Zero Depreciation Affect Your Two wheeler Insurance Premium
- Author :
- TATA AIG Team
- Published on :
A two-wheeler is a depreciating asset, which means bikes age and start losing value. This is primarily due to wear and tear. So, if you buy a new bike and try selling it after five years, you will receive a marginal amount of the sum paid for the purchase. The rate at which the bike loses its market value is called depreciation.
When you buy an insurance policy for a bike, you choose between third party bike insurance and comprehensive bike insurance based on the coverage you need. In third-party insurance, the policy offers coverage for third-party liabilities only. Hence, any damage to your bike is not covered. Therefore, the current market value of the insured vehicle has no impact on the coverage or the premium.
On the other hand, with a comprehensive two wheeler insurance policy, the insurer offers coverage for damage to the insured bike too. Hence, at the time of claim settlement, the insurer needs to ascertain the market value of the bike and its parts to offer the best settlement amount. But, how does it affect the premium of the two wheeler insurance policy?
Before we look at the impact of depreciation on bike insurance premiums, let’s understand the concept of IDV.
What is IDV?
The Insured Declared Value (IDV) is the current market value of your bike. It is also the amount the insurer will pay in the event of a total loss of the insured bike. A bike is declared to be a total loss if it is damaged beyond repair or stolen. Insurance companies calculate the IDV by factoring in depreciation. Hence, as the vehicle ages and goes through wear and tear, its IDV decreases.
Impact of Depreciation on Two-wheeler Insurance Premium
The increasing rate of depreciation results in a lower IDV. Hence, the insurer will pay a lower amount as compensation in the event of a total loss of the insured bike. This has a direct impact on the premium of the two wheeler insurance policy. A lower IDV results in a lower premium.
Therefore, as the depreciation rate of your bike increases, the premium of the insurance policy for bikes decreases.
What is the Bike Depreciation Rate?
The Insurance Regulatory and Development Authority of India (IRDAI), has set depreciation rates for two-wheelers in India. This is based on the age of the vehicle as detailed below:
|Age of the bike||Two Wheeler Depreciation Rate|
|Under 6 months||5%|
|Between 6 months and a year||15%|
|Between 1 and 2 years||20%|
|Between 2 and 3 years||30%|
|Between 3 and 4 years||40%|
|Between 4 and 5 years||50%|
|Over 5 years||IDV decided by Insurance Company and Individual|
Additionally, the IRDAI has also laid down clear guidelines to calculate bike depreciation rate for different bike parts as detailed below:
|Parts of the two-wheeler||Depreciation RateDepreciation Rate|
|Rubber, plastic, or nylon||50%|
|Batteries, tyres, and tubes||50%|
Let’s take an example to understand the impact of depreciation on the IDV:
Rajiv purchases a used bike that is one year old. The ex-showroom price of the particular bike model is Rs. 1 lakh. He decides to purchase a Comprehensive Two Wheeler Insurance policy. Considering the age of the bike, the insurer calculates the IDV as Rs. 80,000 (20% depreciation for bikes between 1 and 2 years old). Hence, Rajiv is charged a premium for a sum insured of Rs.80,000.
Suppose Rajiv meets with an accident and his bike needs to undergo repairs. The insurer will calculate the compensation amount based on the depreciation rate of the different bike parts as specified by the IRDAI.
However, there is a simple way to negate the effects of depreciation on the claim amount – a Zero Depreciation Add-On Cover.
What is a Zero Depreciation Rider in a Two wheeler Insurance Policy
At Tata AIG, we offer 2 wheeler insurance online and many add-on covers to help bike owners get optimum protection for their vehicles. You can choose from third party bike insurance, comprehensive bike insurance, and standalone own damage bike insurance.
Our Zero Depreciation add-on cover ensures that the policyholder receives the claim amount without considering depreciation. Hence, if you have a zero depreciation cover, then the insurance company will not deduct depreciation while calculating the settlement amount during a claim. This ensures maximum reimbursement and minimum out-of-pocket expenses.
However, there are some exclusions to the zero depreciation cover too including -
- Some insurers allow a limited number of claims per year under the zero depreciation rider. Make sure that you check with the insurer before buying the add-on cover.
- It does not cover damages to the bike due to normal wear and tear
- No benefits if the bike is stolen or declared a total loss/constructive total loss
- Usually, bike damages only due to accidents are covered
Depreciation plays a crucial role in determining the IDV of a two-wheeler. Insurance companies determine the premium of a two wheeler insurance policy based on its IDV. Hence, depreciation affects the premium. A higher depreciation rate usually results in a lower IDV and a lower premium for the policy. You can consider opting for a zero depreciation add-on cover to get maximum coverage by paying a little extra premium.
Frequently Asked Questions
Q1. Do older bikes have lower premium rates?
Older bikes have higher depreciation rates that reduce the Insured Declared Value. Hence, these policies have lower premium rates.
Q2. How can I minimise the impact of depreciation on the settlement amount?
To minimise the impact of depreciation on the settlement amount, you can opt for a zero depreciation cover. This ensures that the insurer offers a settlement amount without deducting depreciation.