5 November 2018

Motor Insurance: Recent Regulatory Changes

Tuli & Co


Tuli & Co is an insurance-driven commercial litigation and regulatory practice established in 2000. With offices in New Delhi and Mumbai, we undertake work for a cross section of the Indian and international insurance and reinsurance market and work closely alongside Kennedys’ network of international offices
No commission/remuneration or rewards are payable to insurance agents/insurance intermediaries for the distribution of the Act Only long term policies.
India Insurance
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The Indian Insurance regulator, the Insurance Regulatory and Development Authority of India (IRDAI) has recently brought about changes in the regulations governing motor insurance in India. Under the Motor Vehicles Act 1988, insurance cover for third party liability is mandatory for all motor vehicles at the time of purchase. However, until recently, this third party liability insurance had a mandatory term of one year, and was to be renewed by the policyholder on a yearly basis.

Recently, the Supreme Court of India directed in S Rajaseekaran v Union of India[1] , that a long term motor insurance should be introduced and made mandatory at the point of sale and registration. Following the issuance of these directions, the IRDAI has extended the term of the statutory third party liability insurance to three and five years for private cars and two wheelers, respectively, with respect to new vehicles sold from 1st September 20182. Indian General Insurers were directed to file these products under the File & Use Procedure with the Authority before 15th September 2018 which was later extended to 15th October 2018, on the basis of representations received from the General Insurers3.

Long Term Motor Insurance Cover:

Earlier, the insurance cover for motor vehicles was offered in the form of "Third Party Liability" and "Package Policy", where a Package Policy provided a more comprehensive cover, including own damage of the insured vehicle, in addition to the third party liability offered under the Act Only insurance. The mandatory term for the third party liability component of these policies has now been increased to five and three years respectively for two wheelers and private cars.

Apart from the Act Only policy and the long term package policy, effective 1st September 2018, policyholders may also be offered a "Bundled Policy", where a one year own damage component is bundled with a five year or a three year third party liability cover, as applicable, for two wheelers and private cars respectively. Per the directions of the IRDAI, General Insurers are now required to offer the following motor insurance products at the time of purchase of a new vehicle, for a three or five year term:

  1. Long term Act only policy;
  1. Long term Package policy;
  1. Bundled Policy (with a 1 year component for Own Damage).

General Insurers may also offer motor insurance add-on covers with the foregoing for a period co-terminus with that of the package product, i.e., three year or five years as the case may be. Insurers have also been directed to take cognizance of the movement of IDV over time for all relevant purposes including underwriting, pricing and settlement of claims.

In line with the earlier directions issued by the IRDAI, General Insurers are required to ensure that the mandatory five year or three year third party liability cover is available through online channels, and also continue liaising with police authorities to enable issuance, renewal and easy availability. General Insurers have also been instructed to advertise the long term motor insurance available pursuant to the Supreme Court's directive in S Rajaseekaran.

Premium Rates:

The IRDAI prescribes the premium rates for third party motor insurance, and the same are usually revised on an annual basis and published on the IRDAI's website. Since the term of third party insurance covers has been extended beyond a one year period, the IRDAI has introduced a new premium rate structure for the 3 year and 5 year third party liability insurance, where the premium for the entire term would be collected at the point of sale itself.

Vehicle Category

Existing Premium Rates (Rs.)

Long Term Premium Rates (Rs.)


Not exceeding 1000 cc



Exceeding 1000 cc but not exceeding 1500 cc



Exceeding 1500 cc




Not exceeding 75 cc



Exceeding 75 cc but not exceeding 150 cc



Exceeding 150 cc but not exceeding 350 cc



Exceeding 350 cc



However, the premium collected shall be recognised on a yearly basis, where the premium for that particular year is to be treated as income, and the remaining as "Premium deposit" or "Advance Premium".

Cancellation of Policy:

Pursuant to the directions of the IRDAI, no third party liability insurance can be cancelled by either the Insured or the Insurer, except on the grounds of a) Double Insurance; b) the Insured Vehicle not being in use anymore as a result of Total Loss or Constructive Total Loss; or, c) the vehicle having been sold and/or transferred.

The IRDAI, however, has not prescribed the manner or basis for calculating the applicable refund to the Insured in case of cancellation of policy, and Insurers have largely continued to follow the short period scales for refund of balance premium.

No Claim Bonus:

No Claim Bonus (NCB) is a discount on the own damage component for each preceding claim free year, generally ranging from 20% to 50% of the premium, which is offered by the Insurer at the end of each policy year. Per the directions of the IRDAI, for long term motor insurance covers, the NCB shall be applicable only at the end of the policy term, ie, three years for private cars and five years for two wheelers.

Commission Structure:

The IRDAI has subsequently introduced a new structure for the commission/remuneration payable, rewards, and the MISP's distribution fees for long term motor insurance policies4. Payment of commission/remuneration for long term motor insurance shall be paid in the financial year premium is booked by the Insurer, and shall be restricted to the gross written premium recognised for that year.

No commission/remuneration or rewards are payable to insurance agents/insurance intermediaries for the distribution of the Act Only long term policies. For bundled covers, commission is 15% of the OD premium for new private cars, 17.5% for new two wheelers, and NIL for the TP portion. For package policies, commission has been capped per year as a reducing percentage of the total premium collected. The distribution fees payable to MISPs is marginally higher than the commission/remuneration payable to insurance agents/insurance intermediaries.

Enhancement of Capital Sum Insured:

Pursuant to the decision of the High Court of Madras in United lndia lnsurance Co Ltd v R Rekha[5] , the IRDAI has effectively amended General Regulation 36 of the India Motor Tariff 2002 which prescribed the sum insured and applicable premium for the compulsory personal accident cover for owner-drivers under the liability only and package policies6.

Further, with the introduction of long term motor insurance policies, General Insurers are now required to provide compulsory personal accident cover under Bundled Policies as well.

The IRDAI has now increased the minimum capital sum insured for motorised two wheelers from Rs.1 lakh and private cars from Rs.2 lakhs, to a capital sum insured of Rs.15 lakh for the single year policies, at a premium of Rs.750 per annum. However, for long term motor insurance policies, General Insurers have been permitted to set the premium in terms of their existing pricing approach.

Concluding Remarks

The IRDAI has notified these Circulars pursuant to the orders of the Supreme Court and the Madras High Court, and press reports have indicated that the changes enshrined have been well received by the public. While the industry has also largely welcomed these changes, the short timelines available for filing and implementation has led to widespread discussions on the logistical and product level modifications required.


1 Writ Petition (Civil) No 295/2012 of 20th July 2018.

2 Circular on "Implementation of the Directions of the Hon'ble Supreme Court of India in the matter of WP No 295/2012 of Shri S Rajaseekaran vs Union of India and Ors" of 28th August 2018.

3 Circular on "Filing of Motor Long Term Third Party Insurance/ Long Term Package Covers/ Bundled Products under the File and Use Guidelines" of 19th September 2018.

4 Circular on "Circular on Payment of Commission, remuneration, rewards and distribution fees under Long Term Motor Insurance Policies" of 29th August 2018.

5 Civil Miscellaneous Appeal No. 1428 of 2017.

6 Circular on "Enhancement of Capital Sum Insured in Compulsory Personal Accident Cover for Owner-Driver under Motor Insurance Policies" of 20th September 2018.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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