The Supreme Court, by way of an order in S Rajaseekaran v Union of India and Ors [Writ Petition (Civil) No 295/2012] of 20th July 2018 (Order), has made it mandatory to provide long term third party liability insurance cover with respect to new vehicles sold from 1st September 2018. Under the extant statutory and regulatory framework, insurance cover for third party liability is mandatory for all new vehicles at the time of purchase. However, the policy is renewed on a yearly basis.
The Court has now extended the term of mandatory insurance cover for new vehicles beyond the one year period, to three years for cars and five years for two-wheelers. The implications of the Order will be on General Insurers, who are now mandatorily required to issue three year third party insurance policies for new cars, and five year third party insurance policies for new two wheelers at the point of sale, either as a standalone product or a part of a comprehensive policy.
The Order came as a result of a public interest litigation filed before the Court seeking a direction against all states and union territories for implementing measures for improving road safety. After holding detailed discussions with the IRDAI, General Insurance Council, Ministry of Road Transport and Highways and Department of Financial Services, Ministry of Finance, and the Government of India, the "Supreme Court Committee on Road Safety" (Committee) in its meeting of 26th March 2018 had recommended that, inter alia, it should be mandatory for all General Insurers to issue third party insurance covers for three years and five years, for cars and two wheelers respectively, at the point of sale and registration. The Court observed that the recommendations of the Committee were reasonable.
The Court directed the IRDAI to clear and advertise the long term insurance product immediately, so that it could be implemented from 1st September 2018 onwards.
Further, the Court held that the General Insurers may either choose to offer such long term insurance covers separately, or tied in to a package (comprehensive) product. Vehicle owners may choose to opt for either of these available covers.
The concept of long term third party liability policies was first introduced by the IRDAI vide its circular on "Long Term Motor Two Wheeler Insurance Policy" of 4th August 2014 (Circular). The Circular allowed General Insurers to offer third party liability policies for two-wheelers with a 3 year term, for a fixed lump sum payment of three times the annual premium as notified by IRDAI. Motor third party premium is regulated by the IRDAI, and revised premium rates are published by the IRDAI on an annual basis, based on claims experience.
The Order is, however, silent on the aspect of pricing of such long term motor insurance products, and the onus now rests with the IRDAI to decide the pricing for such products. Since pricing is fixed for such long-term products, and cannot be revised during the pendency of the term, sources in public domain indicate that General Insurers have, largely, not introduced these products, due to the several uncertainties attached in underwriting such risks, and prevalent concerns regarding profitability during the three year or five year tenure. There is also a hesitancy in pricing such long term products based on the premium rates prevalent in the first year alone, as the expected rates of inflation during such period would usually be taken into account before prescribing the premium.
Further, the Committee's report did not provide for suggested timelines for implementation of such long term motor insurance products. However, the Order now puts an obligation on General Insurers to introduce such products in the market within the stipulated deadline. It remains to be seen how General Insurers shall comply with the Order within this brief period, and if any guidance in this regard, will be issued.
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