Tuesday, September 25, 2007

Motor Insurance: Thieving in the name of theft

Auto Insurance companies, The General Insurance Council and the Transport ministry are jointly working on introduction of a specific rule that will make installation of anti-theft devices in motor vehicles and two-wheelers compulsory. The proposed legislation would be applicable for all vehicle owners, both existing and new <link>.

General Insurance Council the representative body of non-life insurers, both public and private sector has tried to justify this move by saying

"Theft is turning out to be a menace for car insurers as well as owners. General insurers lose Rs 1,000 crore every year. As much as 15% of all motor vehicles claims are for theft. Claims paid every year for theft is collected from vehicle owners in the form of increased premium. In the process customers lose. This is a risk-mitigation measure for benefit of owners"

Theft it seems is rampant and plagues the Insurance industry

According to National Crime Records Bureau (NCRB) as many as 66,000 two-wheelers and 14,000 cars were stolen in 2005. Highest incidences of theft were reported in Delhi, followed by Mumbai and Bangalore both for two-wheelers and passenger cars.

And what more the Insurance companies promise that customers would benefit from immediate savings

“Currently, insurers offer a flat discount of Rs 400 if anti-theft devices are installed. This may rise to about 10% of premiums paid after the general insurance industry is detariffed,”

The auto industry is lobbying for the rule to be first introduced for the two wheelers and then extended to other vehicles

Speaking to ET, Society of Indian Automobile Manufacturers (Siam) director-general Dilip Chenoy said, “For starters, the government may introduce the rule for two-wheelers from April 2008. Rules for four-wheelers will be issued subsequently.”

A win-win for all parties involved right. But hey wait...Only on closer inspection can one realize that motor owners are the only ones who don't benefit from this proposal.

The two wheeler population in India is around 1, 48, 00,000 and legally, no motor vehicle is allowed to be driven on the road without valid insurance. Hence, it is obligatory to get the vehicle insured.

On an average a two wheeler owner pays around Rs 600 as Insurance premium. By introducing this law the consumer saves Rs 60 per annum on premium charges. Even assuming a long life span of 10 years for the vehicle and that the premium wont decrease over the years due to depreciation the Present value of the savings works out to around Rs 270 (at 8% interest rate). Against this the vehicle owner has to shell out a minimum of around Rs 1000 to install these devices according to the figures released by the General Insurance Council.

There are 148 lakh two weeler vehicle owners in India. Assuming that on a average the loss incurred by a owner on thief is Rs 25,000 which is on a higher side considering the fact that most vehicles stolen are old and people tend to under value their vehicles in order to reduce premium the overall loss to the consumer is almost Rs 900 crores

(65,800 (lost vehicles) * 25 000 (claim)) - (1,48,00,000 (total number of vehicles) * (1 000 (device cost) - 270 (premium saved))) = (-) Rs 915,90,00,000 (Price payed by the vehicle owner)
The Insurance industry would save money by the reduced number of claims every year, Assuming that the vehicle thefts reduce by atleast 66% (which is not unreasonable as the Insurance companies were already offering an discount of Rs 400 out of Rs 600 for vehicles installing these devices) they save around Rs 20 Crores

((2 / 3) (reduced thefts) * 65 800 * 25 000) - (148,00,000 * 60 (reduced premium)) = Rs 20,86,66,667

And finally the Auto Industry makes a cool Rs 1500 Crore profit plus the extra bucks in all new vehicles sold