The pricing of insurance is data driven. One layer is macro-level data across years and decades about loss incidence for specific risks like fires in factories, accidents involving goods trucks, and people developing heart disease or dying young.
Another layer is micro data of customers like nature of manufacturing and fire accident prevention and preparedness in a factory; maintenance and usage patterns, including geographical, for a truck; and age and medical history of the proposer for health and life insurance, which give insurance companies a basis for group risk pricing.
Both read together, map the risk profile of the prospective insured, and this leads to the appropriate premium.
Yet, if I am in better health than most people in my age group, I can’t help feeling I deserve a better premium. This is managed to a certain extent by no-claim bonuses or incentives such as for not being a smoker as well as loading of premium for negative aspects.
In motor insurance, why should someone who takes out his or her car only on weekends or only to the local bank and supermarket, pay the same premium as a neighbour who drives 80 km each way to work and then some more on weekends?
The answer to this has been the tech-driven pay-as-you-use insurance that Indian insurance companies are all set to introduce on the impetus given by the regulator Insurance Regulatory and Development Authority of India (IRDAI).
Companies have started offering this add-on cover under which you can choose a cap on the distance you drive in the policy period and get a discount.
To start with, your car should have been used for 10,000 km or less per year since you bought it from the showroom. If you choose a cap of 7,500 km a year, you get a 10% discount on your total own damage premium.
If you choose 5,000 km, your discount is 15% and at 2,500 km, 25%.
These discounts have been termed disappointing for two reasons. One, they are only on the own damage cover and the other, they are meagre.
Before addressing that, let us see some terms and conditions. You choose your limit at the time of taking the policy or at renewal. You do have the option to increase your limit mid-year, but you have to do it well before you reach the cap and certainly can’t do it after any accident or claim.
The ‘disappointments’
Third party liability insurance is under a tariff decided by all the companies and not under an individual company’s jurisdiction. It deals with an entirely different set of risks, namely the risk of causing damage or loss to other people’s vehicle, property or life and limb. TP insurance protects you from this monetary liability and the premium is actually quite moderate in India for the benefits it offers and also compared with other countries.
The own damage premium discount appears meagre for an important reason.
The quantity and quality of your use of your car can change the chances of your getting into an accident and your car sustaining damage
However, your own damage insurance offers some coverage when the vehicle is not on the road as well. For example, it covers damage to or loss of your car in a flood, riot strike and civil commotion and due to theft. Hence, the premium for this doesn’t change.
This leaves us with the fact that the discount is actually on a part of the premium, but as that level of detail of premium calculations is opaque to us, we see it as a component of the entire own damage premium and it appears small.
Pay ‘how’ you use
This is premium based on quality of driving and maintenance of your car, to be precise. For this, the insurance company places a telematics device in your car that reports back data on speeding, or how regularly your engine is tuned or tyres are balanced. Your premium is based on this. Another innovation is a floater sum insured for vehicles owned by the same person similar to floater health policies. An umbrella sum insured is applied across vehicles and the total premium outgo will be lower. However, just as in health policies, once the sum insured is used up by one vehicle/ accident, the remaining vehicles will have that much of a lower coverage till the policy year is out.
It is not yet clear how this will work out for different types of cars which, moreover, could be all in use by different members of the household and whether there can be a reset of coverage during the year (as for pay as you use), but motor insurance is getting interestingly nuanced and a certain ‘unfairness’ in premium rating now has a means to be addressed.
(The writer is a business journalist specialising in insurance & corporate history)
