Motor insurance: What is best for you?

A prompt and fair settlement of claims is the hallmark of good service to the insuring public. Motor insurance comes on the top of the list when it comes to insurance. It is for effective claims that we get our cars insured.

We know from the previous article - that there are very little chances of us getting the full loss amount. However, we can still try and figure out ways where we can get the maximum reimbursement.

When our vehicle gets damaged, we are often confused about the choice between a cashless claim and a reimbursement claim. Since, we know that certain amount has to be shelled out from our pocket, which one would be a better option?

Cashless claims

For cashless claims; most of the insurance companies have their own garage network, which they use to repair the vehicles, insured by them. The expenses are dealt directly between the garage and the company.

The owner of the vehicle does not have to worry about the expenses other than the accessories, which are not covered under the policy. They have to make the payment of only the difference amount as confirmed by the claims manager to the garage.

"In a cashless claim, after completion of repair at company's preferred garage, we will make payment of their share of the loss directly to the garage. The insured will have to pay the excess mentioned in the policy and depreciation, salvage, etc informed by the customer service manager," informs Kartik Jain, head, marketing, ICICI Lombard.

Advantages

• "A cashless claim is a complete responsibility of the company. It reduces the worry of the owner of the vehicle," says Kartik.
• The surveyor would take the car to the garage, get it repaired and return it to the owner.
• The company's garage network is generally reliable.
• The service provided by them is much better than any other local garage.

Disadvantages

• A lot of formalities take place before any action takes place.
• Often, the reparations are delayed since the surveyor may do the complete inspection and then take any decision.
• The garage, which they may choose might be expensive and since, the owner has to pay some percentage of the expenses, he may end up shelling out more money than usual.

Reimbursement claims

If the car is serviced in a garage outside the purview of the company's network, then you can claim reimbursement for the same. You choose your own preferred garage and get your car repaired with your choice of mechanic.

You then forward the original bill to the insurance company -- claims manager/surveyor. In case of reimbursement or non cashless claim, original bills and payment receipts are to be submitted to the insurance office.

"The liability and reimbursement amount working will be done by insurance company. Payable amount, along with detailed statement of calculation, is forwarded to the claimant," says V Ramakrishna, managing director, India Insure Risk Management Services Pvt. Ltd.

Advantages

• You may get your car repaired at your preferred garage by your trustworthy mechanic.
• An immediate action can be taken place just after the inspection.
• The garage may fall into your budget as well since even you have to pay for certain expenses.
• You may also repair your other parts of the vehicle which were not damaged at the time of accident.

Disadvantages

• You have to take the entire responsibility if in case the car is not repaired the way it was expected.
• The product replacements done by a local garage may not be as dependable as a renowned garage.
• Many a times, faulty bills are made of bigger amounts are claimed by the TPA (Third Party Agent) on behalf of the owner. He pays the owner for reparations and keeps the additional money with himself. "For example, if the expense were of Rs 5,000, he would claim Rs 8,000 from the insurance company and keep the additional Rs 3,000 with himself," says the DO (development Officer) of one of the renowned insurance company.

Based on these advantages and limitations of both options, it is extremely important that you conduct an appropriate research before giving your car to any garage and get the terms and conditions cleared from the insurance company's representative before taking any action.

Dummies guide to car insurance

All of us having motor vehicles have to go through the yearly ritual of buying insurance on our car. This article attempts to demystify the jargons of motor insurance and processes involved.

The basic jargon:

Insured: Owner of the private car

Insurer: The insurance company

Under the provision of the Motor Vehicles Act all vehicles -- owned by individuals -- should be covered by an insurance policy. The car insurance policy can be either

• Third party or
• Comprehensive insurance policy.

Third party car insurance policy covers only the inter-alia accountability of the vehicle owner for loss or damage to life or property of the third parties.

Whereas comprehensive car insurance policy covers in addition to third party accountability, loss or damage to the vehicle itself by way of accident, theft, etc. and other specified dangers.

Motor insurance policy covers

Section 1 - Loss of or damage to the vehicle insured

The company will reimburse the insured against the loss or damage to the vehicle insured for the following:

• by fire, explosion, self ignition or lightning
• by burglary, housebreaking or theft
• by riot & strike
• by earthquake
• by flood, typhoon, hurricane, storm, tempest, inundation, cyclone
• by accidental external means
• by malicious act
• by terrorist activity
• whilst in transit by road, rail, inland-waterway, lift, elevator or air
• by land slide, rockslide

Cost of protection to the nearest car repair service - Rs 1500.

Vehicle valuation

The car is neither to be insured for reinstatement value nor for depreciated value. It is to be insured for second-hand value in the local market for a similar type of car for a similar model. In the event of loss, the liability of insurance company is the maximum compared to the market value or the amount of insurance whichever is less.

Factors determining premium of a car

• Cubic capacity
• Year of car
• Geographical location
• Value of car proposed
• Various extensions opted for

What does company pay in case of claim for comprehensive cover?

In case of an accident, the insurance company pays for cost of damaged parts which are to be replaced and the labour cost to repair the vehicle.

Will I be eligible for complete reimbursement?

No, it is all subject to a deduction or depreciation at the rates mentioned below in respect of parts replaced

1	For all rubber/nylon/plastic parts	50%
2	For fiber glass components	30%
3	For all parts made of glass	Nil

For all other parts depreciation will be as below

Age of the vehicle	% of Depreciation
Below 6 months	Nil
6-12 months	5%
1-2 Years	10%
2-3 Years	15%
3-4 Years	25%
4-5 Years	35%
5-10 Years	40%
Exceeding 10 Years	50%

The insurance company will not be liable to make any payment in respect of:

• Consequential loss, depreciation, wear and tear, mechanical or electrical breakdown, failures or breakages
• Damage to tyre and tubes unless the vehicle is damaged at the same time, in which case the liability of the company shall be limited to 50 per cent of the cost of replacement
• Any accidental loss or damage suffered whist the insured or any person driving the vehicle under the influence of intoxicating liquor or drugs

Section II - Liability to third parties

• Death of or bodily injury to any person including occupants carried in the vehicle (provided the occupants are not carried for hire or reward)
• Damage to the property other than property belonging to the insured

Section III - Personal accident cover for owner diver

Due to bodily injury/death sustained by the owner-driver of the vehicle by violent accidental external and visible means which independent of any other cause shall within six calendar months of such injury results in

Sl. No	Nature of injury	Scale of Compensation
1	Death	100%
2	Loss of two limbs or sight of two eyes or one limb & sight of one eye	100%
3	Loss of one limb or sight of one eye	50%
4	Permanent total disablement from injuries other than named above	100%

Apart from the above covers the private car insurance policy can include the following endorsements at discounts and payment of additional premium:

• Discount for membership of recognised automobile associations
• Installation of anti-theft device
• Personal accident cover to the insured or any named person other than paid driver or cleaner
• Personal accident to unnamed passenger other than insured and the paid driver and cleaner
• Personal accident cover to paid drivers

Deductibles

It means the minimum amount which cannot be claimed:

• Compulsory deductible - Rs 500 for each and every claim
• Voluntary deductible - The client whilst taking a policy can decide on voluntary deductibles through which the insured may avail a discount on the premium
• Legal liability to employees of the insured other than paid driver who may be traveling or driving in the employers
  

Mutual funds are still the best bet

Though there are more than 3,000 mutual fund schemes, these are well classified across the risk-return spectrum, says Manavendra Prasad.

In an article "Who cares for mutual funds" (Business Standard, September 1), Subir Roy takes what participants in the stock markets call a contra view - an approach contrary to popular belief and understanding to get the best results for the investor.

Let us look at what Mr Roy says while restricting himself to discussing investments in equity-focused schemes.

There are more than 3,000 mutual fund schemes compared to some 500 actively traded shares and, therefore, it is difficult to select the right mutual fund scheme. If one can research mutual fund schemes, it is possible to research stocks too.

The questions are: what is the right tenure of the investment and how does the churn get affected by the performance of the scheme? The performance of the scheme can be affected by a change in fund managers. Choosing stocks of the 20 best-known companies and holding them for a long term are more likely to give handsome returns compared to returns from mutual funds.

This is a crude way of looking at mutual funds, which is arguably the simplest, cheapest and the most regulated way of creating wealth. Let us see why.

Researching mutual funds is a very simple thing: pick up five or six of the most well-known fund houses and you can be confident of robust system and processes with well-defined products with a consistent performance.

Compare this with picking stocks: it involves numerous variables from understanding financial ratios, to the business franchise, to the global macroeconomic environment. It is not possible for a lay investor do so. After all, even equity research analysts specialise in a limited number of adjacent industries.

Though there are more than 3,000 mutual fund schemes, these are well classified across the risk-return spectrum. Choosing two or three different schemes in each category from the well-known fund houses is far simpler than choosing the top 20 companies that will best negotiate vagaries of economic change over the next five to seven years. Unlike stocks, good mutual fund schemes come at no extra cost. On the contrary, they have the wherewithal to keep costs in check.

Organisations with well-established processes, which India's [ Images ] better-known fund houses can now claim to have, do not let their investment performance suffer because of a change in personnel. Such organisations neither create nor promote rock-star fund managers.

Investing in index funds is a passive way of participating in the market and they are judged by how closely they track the respective index. However, the better performing schemes have for the larger part of the last few years outperformed the market. Therefore, passive investments are yet to become attractive in the domestic markets.

A lay investor should arrive at an asset allocation for her investment portfolio depending on her risk profile and returns requirement. Some model asset allocations suggest a 70 per cent exposure to equity and the rest to debt for an investor in her late twenties or early thirties. The allocation to equities reduces progressively as one grows old.

The investor should review her asset allocation once every quarter and rebalance her portfolio to the model asset allocation. This approach helps book profits and enables higher investments when equity markets are doing badly. This discipline frees one of the decisions of the tenure of investments and insulates one from any mis-selling.

Fortunately, the Indian mutual fund industry has evolved greatly in the last few years and the regulator has pushed it to become more transparent and investor-friendly. This ensures that many investor misgivings are addressed. Though there have been quite a few cases of miss-selling, expected regulations and guidelines for mutual fund advisors will largely address this issue.

Investment is a science, it cannot be done on the basis of one's perceptions of companies or the economic environment. It needs expert advice and holding directly held securities in ones portfolio is for the high-net-worth individuals who can afford it.

For lay investors, mutual funds are the best vehicle to participate in the capital markets. Mutual funds bring with them the advantages of professional management. They offer high liquidity and reduced costs because of economies of scale and most importantly, reduce risk through adequate diversification.

For small investors, a systematic investment plan while sticking to the discipline of reviewing and realigning the asset allocation is the best way to create wealth.

How to select a profitable sector to invest in

To find the right stocks to invest in, it's not enough to simply start looking for specific companies that are doing well. Reason: even a good company in an underperforming industry, or one facing adverse economic and technological challenges, will find it tough to sustain its out-performance.

Which is why it is important to first identify strong performing or otherwise favorably placed industries, and then look for leading companies in those sectors to invest in...

The importance of industry analysis is slowly dawning on the Indian investor as never before.

Previously, investors purchased shares of companies without concerning themselves about the industry it operated in.

And they could get away with it three decades ago. This was because India was a sellers' market at that time and products produced were certain to be sold, often at a premium.

Those happy days are long over. Now, there is intense competition.

Consumers have now become quality, cost and fashion conscious.

Foreign goods are easily available and Indian goods have to compete with these. There are great technological advances and 'state of the art' equipment becomes obsolete in a few years, if not months.

In the same way, technological advances in one industry can affect another industry. The jute industry went into decline when alternate and cheaper packing materials began to be used.

The popularity of cotton clothes in the West affected the manmade (synthetic) textile industry.

An investor must therefore examine the industry in which a company operates because this can have a tremendous effect on its results, and even its existence.

A company's management may be superior, its balance sheet strong and its reputation enviable.

However, the company may not have diversified and the industry within which it operates may be in a depression.

This can result in a tremendous decline in revenues and even threaten the viability of the company.

Cycle

The first step in industry analysis is to determine the cycle it is in, or the stage of maturity of the industry.

The life cycle of an industry can be illustrated in an inverted 'S' curve.

he entrepreneurial or nascent stage

At the first stage, the industry is new and it can take some time for it to properly establish itself.

In these early days, it may actually make losses. At this time there may also not be many companies in the industry.

It must be noted that the first 5 to 10 years are the most critical period. At this time, companies have the greatest chance of failing. It takes time to establish companies and new products.

There may be losses and the need for large injections of capital. If a company or an industry is not nurtured or husbanded at this stage, it can collapse.

A good journalist I know began a business magazine. His intention was to start a magazine edited by journalists without interference from industrial magnates or politicians. It was an exceptionally readable magazine.

However, it did not have the finance needed in those critical initial years to keep it afloat and had to fold up. Had it, at that time, had the finance it needed it may have survived and thrived.

In short, at this stage investors take a high risk in the hope of great reward should the product succeed.