Motor insurance in India is mandatory and you are expected to insure your car every year. While this is a big business segment for insurance firms, consumers often end up making bad choices because they are either lazy to do some research or they just get hard sold by their existing insurance provider.

Motor insurance dynamics in first year

Motor insurance has interesting price dynamics in the first and second year of vehicle purchase. In the following illustration, I’ve shown first year and second year premium comparison for the same car offered by different insurance companies

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The wide variation of premiums across different companies is because each insurer insures the vehicle for a different Insured Declared Value (IDV). We have explained how IDV changes impact premium and the risks of choosing a low premium plan here

Important thing for readers to notice is that premium on an average drops around 25% from corresponding quote by same company in the previous year. That is a huge drop considering that your vehicle depreciates only 15% in the first year. The reason for this huge discount is because insurance companies want to win customers and the most likely time when they could poach customers from their competitors in at the end of year 1. As a customer, your existing insurer will offer a 25% no claim bonus and offer a steep discount and hold on to your account. At the same time, competing insurers will throw out even more attractive offers to wean you away from your existing insurer.

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Why is first year insurance expensive?

Looking at the previous table, a question might have popped up in your mind…. Why is the first year insurance so expensive? This question makes a lot of sense because chance of wear and tear on your car is minimal in the first year. So if the chance of going to a workshop is minimal, why is it that you are being charged such high rates in first year? Readers would also note that the IDV does not significantly change in first year(refer table below).

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IDV drops on an average by 12% whereas premium drop is over 25%. Why?

Two reasons actually,

  • Insurance in first year is special because it is embedded into your purchase. You most likely end up buying first year insurance through a car showroom OR through a bank that is offering you a loan. Customers don’t realize the marginal expense because it gets bundled into overall car purchase costs. It is largely customer ignorance at the time of sale that results in a higher first year premium
  • Unlike in other countries, India does not link a driver with a car insurance. In India, anybody can be on the wheel at a time of accident and yet the insurance claim has to be honored. This means that an insurance company has no information on the intrinsic risk: who is going to drive a car, is that driver rash and risky, does (s)he have a bad record etc. The only definite data point that insurance companies get is one year after when you go back for renewal. To price this uncertainty, insurance companies usually charge a higher premium in first year.

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Remember, in motor insurance, your car sales agency or broker or insurer always want you to lazily renew your existing policy. That is in their best interest and its almost always not in yours. So spend some time and use some expert advice to find what works best for you at a cheapest cost.