Understanding Compulsory and Voluntary Excess in Motor Insurance

When it comes to car insurance, understanding the various terms and conditions can be crucial in making an informed decision. Two key concepts that policyholders should be familiar with are compulsory and voluntary excess. In this blog, we will delve into the meaning, differences, and importance of both types of excess in car insurance.

What is Excess in Motor Insurance?

Excess, also known as a deductible, refers to the amount that the policyholder is responsible for paying in case of a claim before the insurance coverage kicks in. It acts as a cost-sharing mechanism between the policyholder and the insurance provider. The excess amount is deducted from the claim settlement.

Compulsory Excess: 

Compulsory excess is a mandatory amount set by the insurance company that the policyholder must pay for each claim. It is designed to discourage frequent small claims and promote responsible driving. The Insurance Regulatory and Development Authority of India (IRDAI) sets the minimum compulsory excess amount based on the type and age of the vehicle. The purpose is to maintain a balance between policyholder affordability and claim costs. The compulsory excess is typically a fixed amount or a percentage of the Insured Declared Value (IDV) of the vehicle. The IDV is the maximum amount that the insurer will pay in case of a total loss or theft of the vehicle.

Suppose the compulsory excess is ₹2,000, and the total claim amount is ₹15,000. In this case, the policyholder will have to pay ₹2,000, and the insurance company will settle the remaining ₹13,000. According to the IRDAI Motor Tariff guidelines, the minimum compulsory excess amount is determined based on vehicle type and age. You can find more information on the IRDAI website under the Motor Tariff section.

Voluntary Excess: 

Voluntary excess is an additional amount that policyholders can choose to pay voluntarily, in addition to the compulsory excess, to reduce their premium. Opting for a higher voluntary excess can lower the premium amount, as it demonstrates the policyholder's willingness to bear a higher portion of the risk. It can be an effective way to save on insurance costs while ensuring adequate coverage. The policyholder can select the voluntary excess amount at the time of purchasing or renewing the policy, usually within a range offered by the insurance provider. The higher the chosen voluntary excess, the lower the premium.

Let's say the policyholder selects a voluntary excess of ₹5,000, and the compulsory excess is ₹2,000. In this case, the total excess for a claim would be ₹7,000. If there is a claim of ₹15,000, the policyholder would pay ₹7,000, and the insurance company would cover the remaining ₹8,000. The IRDAI Motor Tariff guidelines specify that the policyholder chooses the voluntary excess based on their preferences and affordability. The insurer provides a range of voluntary excess options, and the policyholder can select the desired amount.

Benefits of Opting for Excess

Some of the benefits of opting for excess are as follows:

• Lower Premium: Selecting a higher voluntary excess can result in a reduced premium, making motor insurance more affordable.
• Discourages Small Claims: Compulsory excess helps reduce frequent small claims, encouraging responsible driving behaviour. It promotes a more cautious approach and discourages policyholders from claiming minor damages.
• Claim Control: By having an excess, policyholders have greater control over the number and nature of claims they choose to file. They can evaluate whether it is financially viable to claim for damages or whether it is more cost-effective to pay for minor repairs out of pocket.
• Enhanced Coverage: Paying a higher excess can allow policyholders to secure broader coverage options and additional benefits. They can opt for additional riders or add-ons to customize their policy according to their specific needs.
• Authority Source: According to the IRDAI Motor Tariff guidelines, the benefits of choosing excess include reduced premiums and responsible claim behaviour. The IRDAI encourages policyholders to be conscious of their claim frequency and consider the effect on their premiums and the No Claim Bonus (NCB).

Conclusion

Compulsory and voluntary excess play significant roles in motor insurance. While compulsory excess is mandatory and set by the insurer, voluntary excess provides policyholders the option to choose an additional excess amount. Understanding the differences and benefits of both types of excess can help policyholders make informed decisions while purchasing or renewing their motor insurance policies. By assessing their risk appetite, affordability, and the potential impact on car insurance renewal, policyholders can strike the right balance between excess and coverage to ensure financial security in case of unforeseen events.

FAQs

• What happens if the repair cost is less than the excess amount?

If the repair cost is lower than the excess, the policyholder bears the entire repair cost, and no claim is filed. It is advisable to evaluate the cost of repairs before deciding to file a claim.

• Can I change my voluntary excess during the policy term?

Generally, voluntary excess can be modified during the policy renewal. However, it is essential to check with your insurer for their specific terms and conditions regarding mid-term changes.

• How does excess affect my No Claim Bonus (NCB)?

Excess does not affect the No Claim Bonus. NCB is earned for claim-free years and is separate from excess. It rewards policyholders with a discount on their premium at the time of renewal for not making any claims during the policy term.

• Are there any exceptions where excess does not apply?

Excess usually applies to most claims. However, certain policies may have exceptions, such as third-party liability claims where the excess may not be applicable. It is advisable to review the policy terms and conditions for specific details.

• Can I claim back the excess amount from the other party involved in an accident?

Excess is payable by the policyholder and is not recoverable from the other party involved in the accident. The excess amount is the policyholder's contribution towards the claim settlement.