Ever wondered why your accident insurance claims are not always fully paid for? Kartik Varma and Dhruv Agarwala explain the process of insurance calculation

Ever wondered how your car insurance premium is calculated? Often the premium can be adjusted for any bonus or discount that the insurer is willing to offer you, but in any case these are calculated only after the insurer has fixed a premium that they want to charge you. Here we explain the factors that influence the premium that you pay for your car.

INSURED DECLARED VALUE

At any given point, your car has some value associated with it. If you suffer a total loss in an accident, how much do you think you should be compensated for, assuming you had insurance for your car? The amount that you are compensated for under a comprehensive motor insurance coverage is directly linked to what is the value of the vehicle at that point in time. If you have a new car that you have just driven out of a showroom, its value is more than say a three-year-old car with 30,000 km on it. Insured declared value, or IDV, is the value that the insurance company places on your vehicle to estimate its worth at the time you apply for motor insurance.

Motor insurance policies are indemnity policies. That's just a technical way of saying that they just compensate you for an amount up to financial loss that you have suffered on the vehicle, and no more. IDV is the maximum amount that you can claim under a motor insurance policy to compensate for any loss arising from theft or accident. So, if you suffer total loss in an accident of your three-year-old car that is worth 4 lakh at the time of the accident, under no circumstances will you be compensated for more than 4 lakh.

When you buy a new car and are getting insurance for it, the IDV is calculated on the basis of the price of the new car, i.e., its ex-showroom price. If you have a car for which you are renewing the insurance, the IDV will be adjusted for any operational wear and tear that the car has experienced, or to put it in technical terms the IDV is adjusted for any depreciation that it has undergone for a vehicle of its age.

What if you have any accessories like a special music system or speakers in your car? In this case, the value of these items that are additional to the price of the car are added to the IDV, adjusted for any depreciation that these items might have undergone. If you are getting a policy for a car that is more than 5 years old, then the IDV is determined on the basis of an understanding between you and the insurer after adjusting for the depreciation schedule. Please keep in mind that the IDV calculation is used only for a comprehensive insurance policy and not a third party insurance cover.

CUBIC CAPACITY OF THE VEHICLE

Every car has an engine size, which is measured as its cubic capacity. The size of the engine affects the insurance premium you have to pay for a third party insurance cover. The premium amount is the same for a new car as for an older car, because the premium is a function of the engine size, and not the age of the car. Engine capacity is not a criterion used for calculating premium for a comprehensive cover. The table below shows the rates (as of June 2010) on the third party cover premium amount according the engine size. The higher the cc, the higher will be the premium. You can find out the cc from the registration papers of your vehicle. (See Cover Drive: Table 1).

These figures are the basic minimum amounts as stipulated by the Indian Motor Tariff Act. There might be an additional amount that you are obliged to pay above this minimum for third party coverage. These minimum amounts are the same, irrespective of the brand or the age of the car. All that matters is the engine capacity.

GEOGRAPHICAL ZONES

The city or town that your car is registered in can affect the amount of motor insurance premium you pay. India has been divided into two zones, Zone A and B, depending upon the kind of risks that motor vehicles in these areas are exposed to.

Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, Mumbai, New Delhi, and Pune fall in the Zone A, and vehicles in these cities are considered more vulnerable to theft and accident. The rest of India falls into Zone B. Zone A cities have a higher motor insurance premium than Zone B. For example, if your car is registered in Delhi, you will pay a higher premium compared to a person whose car is registered in Jaipur.

AGE OF THE VEHICLE

As your car ages, it loses value due to a few reasons. Newer models come out that reduce the value of your older model. Additionally, the wear and tear that the vehicle undergoes makes it less valuable than a new car of the same model. There is a set schedule that applies to vehicles that adjusts their value based on how old the car is, independent of the brand of the vehicle.

Insurance companies follow the above schedule to decide the premium that you will pay to have your car insured. However, as mentioned above, for vehicles that are older than five years, the insurance company and you will mutually arrive at a valuation your vehicle, which will take into account the condition of the vehicle and the depreciation schedule. If you want only a third party policy, then the above depreciation schedule does not apply. The premium is decided based upon the engine size only.

Source: The Economic Times