Depreciation change in insurance claims to hurt consumers

As private general insurance companies are fanning the market for business, the Tariff Advisory Committee (TAC) – the premium fixing body for general insurers – has brought about a change that is likely to customers.

The TAC has decided to reintroduce the concept of depreciation while settling claims for accidental damage to private cars and two-wheelers. The decision has come into effect since 1 April, 2001. With this, the TAC has now decided to withdraw the in-built 10 per cent loading in the premium.

In 1998, in a customer-friendly move, the TAC decided to remove application of depreciation on new parts replaced in claims of private cars/two-heelers. Though the move was not warranted then, as the four public sector insurers were crying hoarse about mounting motor claims, the TAC had went ahead with its decision.

At that time, an official of the United India Insurance Company Ltd., Chennai, had said that the own damage ratio (damage to vehicles) is well within the limits, and that the companies could meet any increased claims pay out resulting from not applying of depreciation on new parts.

Reacting to the TAC's recent move, Mr. R. Ramalingam, director, United India Insurance, remarks, "The decision to settle claims 100 per cent without any deduction was a customer-friendly move. But unscrupulous vehicle repairers - be it authorised service stations or not - took advantage of this provision and resorted to replacement of parts, however small the damage might be."

While the bottom line of service stations and repair stations swelled due to increased component sales and vehicle owners were happy by getting new for the old parts, it was the insurance companies who suffered the brunt.

For instance, the own damage claims ratio of the United India Insurance went up by 10 per cent to 62 per cent during 1999-2000. However, it is not known whether private insurers had a role to play in TAC's recent decision.

According to Mr. Ramalingam, the benefit of 100 per cent claims settlement could be extended on payment of additional premium. But a decision to this effect is yet to be taken by the TAC.

That apart, in a move to give freedom to insurers in evolving their own rates, the TAC has said that the premium fixed by it is the minimum rate and individual companies are free to charge higher rates.

This gives flexibility to general insurers to evolve their own rates based on their claims ratio. The other possible fall out of this is the freedom to insurers to revise upwards the third party premium.