Madras high court's ruling of compulsory 5 years car insurance can increase the cost of new cars by up to 5 lakhs.
The Madras high court decision mandating 5-year 'bumper-to-bumper' car insurance is all set to raise the cost of car purchase by 8-10 percent of its current price. Dealers and car marketers expect that the price of a car would rise by Rs 50,000 to Rs 5 lakh as a result of this move.
Vinkesh Gulati, head of the Federation of Automobile Dealers Associations (FADA), said, "This would be a major issue for a sector that is still recovering from the pandemic. It would add Rs 5,000-6,000 to the purchase price of motorcycles and scooters, Rs 50,000 to the purchase price of entry-level cars like the Alto or Kwid, and more than Rs 2 lakh to the buying price of a mid-market SUV like the Creta."
The catch is that the industry regulator IRDAI in August 2020 removed compulsory long-term insurance for new cars. According to Ravi Bhatia, head of JATO Dynamics, the IRDAI must agree to change the premium structure.
At the moment, one-year insurance costs about 3% of the car's cost. The cost of one-year insurance is now about 3% of the car's value. With this decision, the dealer needs to offer the car with 5-year insurance, a significant upfront cost for the buyer.
Given that the insurance business worldwide is going towards more flexibility where the consumer pays per month based on use, this is counter-productive and would retard car sales, he said.
Car marketers believe this will go against the holistic perspective of the car industry, which combines affordability, safety, and growth. According to Rajeev Chaba, president, and CEO of MG Motor India, "the automobile business needs a "holistic perspective" that balances customer interests, safety, the total cost of purchase and ownership, environmental and emission issues, as well as job development and local manufacture. He claims that "exceptional growth" is impossible without it.
Insurers split in their view on whether a complete cover may make mandatory. "Under the law, a car owner is simply requiring to acquire third-party insurance. A comprehensive insurance policy is a contract between two parties that enter voluntarily.
Someone may appeal on the grounds that they cannot be forced to purchase a cover. On the other hand, mandatory coverage is feasible since it is the only way to ensure insurance penetration. Without required third-party insurance, there would not be the kind of insurance coverage that we have today.