Understanding How Your Car Insurance Premium is Calculated

 

When it comes to insurance policies, there's often a lot of fine print to sift through - the Terms and Conditions, the Exclusions, the Special Cases. However, one thing that is usually provided up front is the premium. We are given a number, but rarely do we truly understand how that number was arrived at or the intricacies involved in the calculation process.

The premium for your car insurance depends on several factors, which I will outline below:

Insured Declared Value (IDV) of the Vehicle:

The IDV refers to the maximum amount that an insurance company will compensate you for in the event of a total loss or theft of your vehicle. It is calculated based on the current market value of your car after deducting the depreciation value. The higher the IDV, the higher the premium, as it indicates a greater risk for the insurer.

Type and Age of the Vehicle:

The type and age of your vehicle play a crucial role in determining the premium. Newer vehicles generally have higher premiums due to their higher market value and replacement cost. Additionally, the make, model, and variant of your car also influence the premium. Cars with a higher cubic capacity engine or those that fall under the luxury segment tend to have higher premiums.

Cubic Capacity of the Engine:

The cubic capacity of your car's engine, also known as engine displacement, is another factor considered in calculating the premium. Cars with larger engines generally have higher premiums as they are more powerful and can potentially cause more damage in accidents.

Geographical Zone:

The location where your vehicle is primarily used and registered also affects the premium. Insurance companies categorize different areas into zones based on the risk associated with that particular location. Areas prone to accidents, thefts, or natural disasters may have higher premiums compared to relatively safer regions.

Now, let's delve into the three primary components that make up your car insurance premium:

Third Party Cover:

In India, it is mandatory to have a Third Party Liability (TPL) cover if you own a car. This cover protects you from any financial liability arising from damage caused to a person or property by your insured vehicle. However, TPL does not cover expenses incurred for repairing your own vehicle. To ensure comprehensive coverage, it is advisable to opt for a policy that includes coverage for damage to your own vehicle as well. The TPL premium is determined based on the car's capacity and is regulated by the Insurance Regulatory Authority of India (IRDAI).

Own Damage (OD) Cover:

The OD cover is optional but highly beneficial. It reimburses your expenses in case your car is damaged due to natural events like earthquakes, fires, storms, or accidents. The premium for OD cover is calculated as a percentage of the Insured Declared Value (IDV) of your car, as determined by the Indian Motor Tariff. As your car ages, the IDV decreases, resulting in a lower premium for the OD cover. The formula to calculate the OD premium amount is.

Own Damage premium = IDV × [Premium Rate (decided by the insurer)] + [Add-Ons (e.g., bonus coverage)] - [Discounts & benefits (e.g., no claim bonus, theft discount, etc.)]

Personal Accident Cover:

This component of your car insurance premium goes beyond protecting your car and safeguards you against accidents and mishaps that may lead to disability. It is essential for comprehensive protection, considering the higher likelihood of disability compared to other outcomes. In road accidents, for instance, the number of people seriously injured or permanently disabled often exceeds the number of fatalities. You can also increase the sum insured to include unnamed passengers in the policy. The premium for personal accident cover increases as the sum insured rises.

Additionally, there are other riders or add-ons available for your car insurance policy. These riders provide additional protection and services at a nominal cost. Some common examples include:

Engine Secure:

This rider protects your vehicle's engine against damage caused by waterlogging or similar incidents.

Roadside Assistance:

This rider provides assistance if your car breaks down in the middle of the road, ensuring prompt support and towing services.

NCB Protection:

No Claim Bonus (NCB) is a discount offered on the premium for every claim-free year. The NCB Protection rider allows you to make a certain number of claims without losing the accumulated NCB.

These are just a few examples of the many riders available, each enhancing your car insurance policy and ensuring you are well-protected in various situations.

In conclusion, your car insurance premium is calculated based on factors such as the Insured Declared Value (IDV) of the vehicle, type and age of the vehicle, cubic capacity of the engine, and geographical zone. The premium comprises three main components: Third Party Cover, Own Damage (OD) Cover, and Personal Accident Cover. Riders or add-ons can be included to enhance your policy further. By understanding these factors and components, you can make informed decisions when choosing the right car insurance coverage for your needs.

Also read: Tips for Safe Driving in Foggy Weather

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