How Car Insurance Calculation Works With An Example

Ever wondered how car insurance calculation works? Or the basis of the sum insured and the amount of premium paid annually?

Driving your favourite car with your hard-earned saved money is a big milestone in your life.

And you are in love with your car.

The other side of love is protection. Buying a car is one thing and safeguarding it is another. Car insurance is the key.

At the same time you must understand having car insurance will help you to protect from any financial losses incurred in an unforeseen situation.

But…

To make the most of the car insurance policy, you should know the basic calculation of the sum insured and premium paid. Knowing about, how car insurance calculation works, will help you in the long run.

Consequentially, you can avoid misunderstandings or discrepancies.

We will see how car insurance calculator works with an example.

The type of coverage, one should opt for is a Comprehensive Car Insurance Policy as it provides protection to your vehicle & covers liability for a Third Party.

Comprehensive Car Insurance Policy:

This plan offers overall protection against damages to your vehicle due to accident/ other collision, theft, third party legal liability and cover for personal accident.

The quote that you receive is the sum of below components:

  1. Own Damage Premium
  2. Third Party Premium
  3. Premium for Personal Accident Cover for Owner Driver, Passenger & Paid Driver
  4. Charges for Additional Cover/ Riders
  5. Service Tax

PREMIUM: OWN DAMAGE PREMIUM – (NO CLAIM BONUS + DISCOUNTS) + LIABILITY PREMIUM AS FIXED BY IRDAI

OWN DAMAGE PREMIUM:

Own damage cover is optional but highly beneficial. It provides protection to your vehicle in the event of damage due

  • Natural Calamities (Like Earthquake, storm, fire, etc.)
  • Man Made Calamities (Riot, Strike, Malicious Damage, Terror Attacks, etc.)
  • Accidents, etc.

Factors that are determined while calculating Car Insurance Premium are:

  1. IDV or Insured Declared Value
  2. Location (Geographical Zone)
  3. Engine Cubic Capacity (CC)
  4. No Claim Bonus
  5. A) IDV or Insured Declared Value

IDV is the maximum amount one can claim during the policy period. This is the value of your car attached by the insurance company based on the ex-showroom price and age.

It indicates the current market value of your car.

Something to keep in mind about IDV: The IDV changes as the year passes. It means that, when the value of your car depreciates, the IDV also depreciates.

This IDV is related to the Ex-showroom price of the car. Ex-showroom price is not same as on-road (Generally, on road price includes road tax and other taxes) price.

General Grid of IDV calculation:

VEHICLE AGE                                                IDV Percentage

NEW (0 to 6 Months)                                 95% of Ex-showroom

6 Months to 1 Year                                     85%

1 Year to 2 Years                                         80%

2 Years to 3 Years                                       70%

3 Years to 4 Years                                       60%

4 Years to 5 Years                                       50%

Note: The IDV for vehicles aged over 5yrs is calculated as per the mutual agreement between insured and insurer.

Own Damage (OD Premium) = IDV x Premium Rate (Based on Zone, Cubic Capacity and Vehicle Age)

  1. B) Location (Geographical Zone):

In India, the car insurance policies are segregated by location. And it is categorised as Zone A and Zone B (Used for Private Car Vehicle).

Zone A:  Delhi, Mumbai, Kolkata, Chennai, Bangalore, Hyderabad, Pune, Ahmedabad

Zone B: Rest of India

Depending on the Zone the premium is calculated.

  1. C) Engine Cubic Capacity:

Premium amount calculated also depends on the engine cubic capacity. If the cubic capacity is more, the premium charged will be more.

Sample calculation of premium:

Let’s suppose you bought a car worth 5 lakhs (Ex-showroom price), Manufacturing Year – Jan 2015.

Location: Mumbai (Zone A) with Engine cc < 1000 cc

VEHICLE IDV:

Two years old, the IDV will be 70% of the Ex-showroom price:

IDV = 0.7 x 5,00,000 = 3,50,000

The Insured Value of your car is Rs. 3,50,000.

Note: Ex-showroom price of the vehicle may differ depending on the insurer you choose.

OD Premium Calculation:

Now, Own Damage (OD) calculation: IDV x Premium Rate

Registration of car is of Mumbai i.e. Zone A with < 1000 cc

Premium Rate = 3.127%

OD = 3,50,000 x 0.03127

OD Premium = Rs. 10,945

No-Claim Discount:

If you have made “no-claims” in these two years of span, you get 25% No-Claim Bonus. The premium amount for the third year will be 25% less.

OD = 10,945 x 0.25 = 8208

Own Damage Premium will be Rs. 8,208

Note: There are certain companies who offer discount depending on the Make, Model & type of vehicle. For detailed discount list, please check with the insurance company.

THIRD PARTY CAR INSURANCE/ LIABILITY COVER

Third Party Car Insurance covers the owner against any legal liability caused to the third party. It covers any damage or injury caused by the insured’s vehicle, to another person or property.

It is mandatory in India as per the Motor Vehicle Act, 1988.

Features of Third Party Car Insurance are:

  • Death or bodily injury to a third party
  • Damage to third party property
  • Accidental Death or Permanent Total Disability of the vehicle’s owner, passenger or driver

However, claims pertaining to damage happened to the owner’s vehicle couldn’t be claimed.

Motor Insurance Third Party Rates (2016):

The premium for motor third party rates are decided by the Insurance Regulatory Development Authority of India (IRDA)

Based on Engine CC:

Condition Relating to Engine Capacity Applicable/ Fixed Premium Rate
Not exceeding 1000cc Rs. 2055
Above 1000cc but less than 1500cc Rs. 2237
Exceeding 1500cc Rs. 6164

*Note: Motor Third-Party Insurance Premium with effect from 01st April 2016

If you just buy third party, this is the basic premium you have to pay based on engine cc.

THIRD PARTY PREMIUM CALCULATION:

Now, let’s calculate the Third-party (TP) car insurance premium:

TP: 2055 Rs per annum (CC of the vehicle is <1000cc)

PERSONAL ACCIDENT COVER:

It offers accidental damage and permanent total disability for the owner driver, passenger & Paid driver in case of an accident.

Compulsory Cover: Personal Accident Cover for Owner Driver: Rs. 100 /person (2 Lakhs Sum Insured)

Optional Cover:

  • Passenger Personal Accident cover: 100 Rs/person with 2,00,000 Sum Insured
  • Legal liability for Paid driver: 50 Rs

TP Premium includes cover for Personal Accident Liability

Basic TP Premium + Personal Accident Owner Driver

Total TP Premium: 2,055 + 100 = Rs. 2,055

Final Premium: Own Damage + Liability/TP

= 8208 + 2155

= 10,363 + Applicable ST

Additional Discount:

Insurer Discounts: The owner may get some discounts on the premium depending on the insurer. Also, the owner of the car can buy additional “Add-on” covers which I’m going to share below.

Anti-Theft Devices: 2.5% discount or max. Up to Rs. 500 on the premium for cars with Anti-theft devices approved by Automobile Research Association of India (ARAI), Pune and duly certified by any of the Automobile Associations.

Member of Auto Association: 5% discount up to maximum of Rs. 200

Voluntary Discounts: Discount given for opting extra deductible over and above compulsory deductibles (It varies from 20% to 35%)

Add-ons’/ Riders:

This add-on may increase your premiums, but are super money saver at the time of claims.

And some additional riders you may opt which will help you during claims are:

  • Zero Depreciation Cover or Bumper to Bumper Cover
  • Accessories Cover
  • No Claim Bonus Protection
  • Roadside Assistance & Towing Rider
  • Engine Protection Cover
  • Medical Expenses & Accidental Benefit Rider
  • Return to Invoice cover
  • Consumables Cover

EXCLUSIONS:

Before we wrap up let us also have a look at the major “Exclusions” which are not covered by a car insurance policy:

1) Individual driving without a valid driving license or under the influence of alcohol, drugs and other intoxicating drinks

2) If the accident has taken place outside the geographical area covered under the policy

3) Mechanical or Electrical breakdowns in the vehicle

4) If the insured vehicle used for any unlawful reason, for instance, a private car used commercially

I hope by now, you know how the car insurance calculation works.

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