Insurance cover for the Nano won’t be cheaper than M800’s

The cheapest car in the country may not be the cheapest in terms of insurance premium.
Insurers and brokers say the insurance cover for the smallest car, Tata Nano (623 cc), will be priced on a par with the existing cars in the sub-1,000cc space, such as Maruti 800 (796 cc), Alto (796 cc), Omni (796 cc), A-Star (998 cc) and Chevrolet Spark (995 cc).

“Pricing of insurance cover may be currently at par with similar models and may be altered later, depending on the profile of buyers, cost of spare parts and the claims figures,” says Vijay Kumar, head - motor insurance at Bajaj Allianz General Insurance.
General insurance companies, which provide motor or car insurance, haven’t so far informed brokers about special pricing, if any.

“There are no special instructions from insurance companies for Nano, which tells us that the same premium rates charged for any other car below the 1,000 cc range may be applicable,” says Rahul Agarwal, chief executive officer of Optima Insurance Brokers.

This means Tata Nano buyers would be paying the same premium for the car insurance cover that is charged for 800 cc vehicles, which is around Rs 2,400 or 2% of the price of the car.

But why would the insurer charge the same premium for a 623 cc car that he is charging for the higher engine capacity cars? Shouldn’t the premium be lesser?

To understand the answer one would need to understand the components of a car insurance premium first. Car insurance has to be renewed at the end of each year.
General insurance companies charge you for various other things besides the damages your car may suffer during the year for which the insurance cover is provided.

Among other things, the insurer estimates the amount that would have to be paid for the car damaged by the policyholder in case of an accident. This is called third party insurance. Insurance experts say that in case of Nano, though the cost of damage repairs for the policyholder’s car may be lower than for the Maruti 800, the third party insurance (insurance cost for opposite party’s damaged vehicle) cost may remain fixed.
In addition, the company incurs costs on processing the claim, which too would be constant in spite of the size and the cost of the car.

“Even as values (car prices) go down, the repair costs remain the same. The labour costs for garage and insurance companies’ claim handling costs remain the same,” says Yashish Dahiya, chief executive officer and co-founder of Policybazaar, an online insurance seller.

So, though Nano costs Rs 1 lakh less than its closest competitor, the insurance company cannot reduce the salary of a person handling claims process for Nano cars and the garage owner cannot do the same with his staff. Hence, insurers would deduct that amount from the car insurance policyholder’s premium.

For all that, however, some companies may price the insurance cover for Nano at a discount to sub-1,000 cc car insurance as the general insurance market has entered the phase of freedom from fixed pricing model. In this detariff regime, insurers are offering a huge discount to the earlier premium, just to attract customers.

Given the lower engine capacity, the premium may be at a discount of 10-20% of what is charged for vehicles below 1,000 cc, says an official of a public sector general insurance company.

However, insurance companies agree that pricing of the insurance cover is not possible until the pricing of the parts is not made public and they see the claims figures. Companies are also looking out for the frequency of the car delivery, whether the car would be in driven in rural or urban areas and whether the second lot of Nano will be priced at the same level of Rs 1.34-1.85 lakh.

Sustaining sub-1,000 cc premium rates would be difficult for insurers and the premium rates would be altered later, feel experts.

“After the launch, the insurance premium for Nano would be increased very soon as companies will realise that the repair charges of Nano will be similar to that of other cars, even though the vehicle’s engine capacity is below 800 cc,” says Agarwal of Optima Insurance. “Also, there will be a lot of theft claims as there is demand for the vehicle and it is easy to dispose of. This might push up the premium later.”