Car insurance now sold by general insurance companies in India is one-size-fits-all product but that might be about to change
India is one of the few large markets where insurance rates are indexed almost exclusively to car models and mileage. Put simply, a car with same age, will cost the same amount to insure regardless of who the owner is and where he or she lives.
The difference, if any, arises as a result of ‘no claims bonus’, an incentive for not having made any claim during the preceding insurance policy tenure.
However, that may change sooner than later. Premiums pegged to geography—essentially place where you live—might not be far away. And when that happens, what you pay to insure your car could vary significantly depending on the city you live in.
Consider this: The rates we pay will eventually get linked to the ‘Loss Ratio’ for insurers. The loss ratio is the ratio of losses to gains. For insurers, this translates into the ratio paid insurance claims to premiums earned. For example, if an insurer pays Rs. 5,000 in claims for every Rs.10,000 in collected premiums, the loss ratio is 50%.
Loss Ratio in turn is an outcome of number of claims resulting from accidents (frequency) and the amount of claims (severity) made in case of each accident. Multiply Severity by Frequency and you have the total money that an insurer has to pay.
According to a research by PolicyBazzar.com, insurers had to pay just Rs. 46 as claim for every Rs 100 they got in premium—a pretty good deal—for Mumbai customers. Thus the loss ratio in Mumbai was 46%. The situation in the Chandigarh was the opposite—the payout in claims was Rs. 110 for every Rs. 100 of premium earned.
What implications could this have on premiums pricing?
The answer is obvious: Since insurers have high margins in Mumbai, they can reduce the premiums in Mumbai. Conversely, since they are currently loosing money in Chandigarh, they will eventually be forced to raise premiums for the city’s drivers.
So how do other cities stack on Loss Ratio?
Hyderabad, Delhi and Pune do reasonably well with the loss ratio in the 60% range and should see premiums drop. On the other hand, Noida and Faridabad (87%) and Lucknow (100%) fare quite poorly and are likely to see premiums rise. Interestingly, Gurgaon, which makes up the fourth city in NCR, does much better than Noida and Faridabad with a loss ratio in mid seventies percent.
At state level, the south-western belt of Andhra Pradesh-Karnataka-Maharashtra does quite well with 61% loss ratio. UP-Haryana-Gujarat were the worst performing states with a loss ratio of 82%.
Industry expects insurance premiums to start reflecting the loss ratios within a couple of years’ time. And when that happens customers in cities and states that score poorly on this metrics will have to shell more to insure their vehicles.
That is, however, the short to medium term scenario. In the longer term, that is over 3-5 years, further fine-tuning in how premiums are computed. We should see Usage Based Insurance (UBI) enter the picture.
UBI is the new buzzword in auto insurance globally. Imagine that while shopping for your next car insurance, your are offered a policy that lets a black box, dongle or a mobile phone app tracks how you drive, and saves you up to 30 percent on premiums. This is the future of connected car insurance, and is commonly referred to as usage-based car insurance (UBI), where premiums are based on how you drive, when you drive and where you drive. With UBI, you pay less in premiums if you are what the technology deems a ‘safe driver.’
Another impact of UBI could be that annual premiums are replaced by Pay as you drive (PAYD) and pay how you drive (PHYD) business models. In addition, greater influence of data analytics will see options such as manage how you drive (MHYD), gain momentum beyond 2020.
So, be it short, medium or long term, driving safely would be the only way to keep insurance costs low for yourself and your fellow roadies. The days of good drivers subsidizing the dangerous ones are about to end.
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