Multi-year insurance for two-wheelers

Multi-year insurance or long term insurance is worth considering when it comes to motor insurance for tw-wheelers. This would help reduce the number of uninsured two-wheelers plying on Indian roads. The insurance term could vary from a three-year to five-year or ten-year policy.

Motor insurance lapsation is high for two-wheelers when compared to cars or other light motor vehicles (LMVs). Cost is the main reason for this. Small premium amount and commission amount does not interest the agents to follow-up on renewals. Depending on the age of the vehicle and its past claim record the insurance amounts to anywhere between Rs.500 to Rs.800. In most cases the only time the consumer would have paid attention to insurance is at the point of sale, where the showroom vehicle comes with first year insurance.

With the present structure of annual renewals, the onus of renewing lies with the owner of the vehicle. Once the customer fails to renew within the renewal date, it is observed that they are all the more reluctant to renew it with a penalty of late fees and in turn increasing the number of lapses.

One way to address this issue would be to bring into practice the sale of long-term / multi-year insurance policies for two-wheelers.

General Insurance Council (GIC) in partnership with other non-life insurers is working on developing such lomg-term cover for two-wheelers. The vehicle owners wil have an option of paying the entire premium at one go. Mr S.L. Mohan, Secretary General, GIC, mentioned that providing discounts for long-term insurance will further bring in lot of uninsured vehicles under the purview of insurance.

Both third party (TP) and own damage (OD) aspects of vehicle insurance (comprehensive cover) needs to worked out by the actuarial team in designing this product and to arrive at an affordable long-term insurance premium amount.

Third-party (TP) cover protects accident victims (other than the owner and the rider) while the own-damage (OD) portion insures the bike in case of an accident. Premium for a bike priced at Rs 50,000 is about Rs 900, which includes TP as well as OD. If there are no claims, bike owners receives a no-claim bonus on the premium to the extent of 20% in the first year and keeps on increasing by 5% for every claim-free year to a maximum of 50% discount. All these needs to be incorporated in the new long-term policy.

Mr Vijay Kumar, head motor insurance at Bajaj Allianz General said: “Currently, TP premiums are fixed by the regulator and is uniform across India. However, experience show that there are geographical locations where incidences of claims are very high. This makes the portfolio loss making. Insurers should be offered some lee-way so that they can factor in such high incidences in the premium while working out the long term policy.”

According to the latest available data from Tariff Advisory Committee, about 2 crore two-wheelers were insured in 2007-08. Although there is no published data on the number of two-wheelers plying on Indian roads, close to 4.5 crore two-wheelers have been sold in the past seven years, according to the Society of Indian Automobile Manufacturers (SIAM). Each year about 75 lakh new two-wheelers get added to Indian roads; 84 lakh vehicles have been added so far this financial year.

Debate over agent commission cut

This has been the topic of discussion for some time now in Indian insurance scene. Understandably, with the 2008 recession and the financial crisis that followed, banks and insurance companies which were affected the most have started looking inward in terms of cutting costs. Distribution channels were the target. Most of the companies, especially in the emerging markets, incur heavy expenditure in setting up and running the distribution channels. It is these sales costs that are hurting the companies.

Its been a decade now with the liberalisation of insurance industry in India and one has witnessed a profileration of private insurance companies (with a 74:26 local-foreign joint venture). While increased competition has continued to drive down prices, expand product portfolios and shift focus on customer service, distribution and management costs have continued unabated. Indian insurance being agent-centric, commissions and agent fees constitute a major part of insurance companies' expenses.


The D Swarup committee on investor awareness and protection, formed by Govt., has come out with suggestions addressing the above mentioned issue on distribution costs. The panel suggests moving towards a commission less regime for financial products which includes insurance as well. The point to be noted is that commission is embedded in insurance products, where as the same is not the case in pension. Mutual funds too have incorporated the no-load structure. This would effectively mean a cut in commission to insurance agents, the bed rock of insurance distribution in India.

The panel plans to gradually phase out upfront commissions paid to agents and introduce a fee structure by April 2011. This has been met with a lot of opposition from life insurance agents and recently by IRDA as well. Agent's commission could be as high as nearly 15% to 20% of first year's premium paid by insurance buyer.

Eliminating commissions would result in insurance penetration suffering a setback and diminishing the role of agents. Insurance customers, urban and rural alike, irrespective of newer distribution channels such as bancassurance and internet sales, still prefer the agent route when it comes to life insurance.

The panel is now planning to modify its suggestions based on pure insurance products and ULIPs by alloting different regime of reducing/eliminating commissions.
It needs to be seen how the Govt. responds to this and if there would be any modifications in the final report.