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Basic Guide to Understanding Two-Wheeler Insurance Depreciation

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Depreciation is an immutable fact of life. As we use up machines and equipment, it tends to experience wear and tear and thus ends up losing value over time. It is also the reason why buying second-hand goods and vehicles is always cheaper than new ones. When you buy an insurance policy for your bike or scooter or for any other vehicle, the insurance company will also account for depreciation on its various parts and adjust the value of your two-wheeler accordingly. This is also accounted for in two wheeler insurance cost whereas the bike or scooter gets older, it becomes cheaper to insure it.

The concept of depreciation and its impact on policy premium:

In terms of auto insurance, depreciation is the reduction of the amount of money from the Insured Declared Value (IDV) of the vehicle as assessed by the insurance company. This happens because of factors like age of the vehicle, wear and tear caused by regular usage of the vehicle and the fact that a vehicle has a finite lifetime as defined in the registration certificate of the vehicle. The rationale is to judge the price of the vehicle if it were to be sold in an as-is condition in the open market.

The older a vehicle gets, the faster it loses its value. This is the reason that older vehicles also tend to depreciate more and lose value faster. The premium of your two-wheeler is also directly impacted by depreciation level. The more a vehicle depreciates, the less is its IDV and the lesser is its own damage cover cost. Remember that third party cover and personal accident cover are fixed premium policies and are not impacted by depreciation.

Rate of depreciation

Different parts of the bike are impacted at different rates of depreciation depending upon what item the part is made of. This depreciation table by Insurance Regulatory and Development Authority of India (IRDAI) provides following parts-based depreciation.

• 50% depreciation in all parts made of rubber, nylon or plastic

• 50% depreciation in tyres as well as battery of the vehicle

• 30% depreciation in all parts made of fibre glass

This system is being replaced by an overall vehicle age-based depreciation system. This vehicle age-based depreciation is being enforced for partial losses. As per IRDAI, this new system will make the claim process completely objective and reduce any ambiguity or any kind of subjectivity in the claim settlement process. IRDAI states that parts-based depreciation system was confusing to vehicle owners and a standardised grid that is based on a vehicle age-based depreciation system will remove many complexities from the system. The proposed age-based depreciation system provides following rate of depreciation:

Age of The Vehicle	% of Depreciation For Fixing IDV
Not exceeding 6 months	5%
Exceeding 6 months but not exceeding 1 year	15%
Exceeding 1 year but not exceeding 2 years	20%
Exceeding 2 years but not exceeding 3 years	30%
Exceeding 3 years but not exceeding 4 years	40%
Exceeding 4 years but not exceeding 5 years	50%

How to overcome depreciation?

If you are planning to get a TWO WHEELER INSURANCE, there is a great add on to your comprehensive policy that will help you bypass the reduction of IDV of your vehicle. When you buy a comprehensive two wheeler insurance policy, make sure that a zero depreciation add on is included in the bike insurance deal. This add on will slightly increase the amount of money you pay as BIKE INSURANCE PREMIUMS, but it will also protect you from ‘loss of value’ imposed by depreciation. While buying a zero depreciation add on, you have to be mindful of the below mentioned factors:

• The zero depreciation cover may also be known as bumper to bumper cover by some insurance companies, but they are essentially the same thing.

• The zero depreciation add on is an optional extra and it may not be added by default if you are planning to buy policy online.

Conclusion

Depreciation is a necessary factor in insurance policies because it allows for fair market value prediction by vehicle insurance companies. If you are looking to get a new bike or scooter, it is best to pay extra for a zero depreciation cover with your two wheeler insurance for as long as possible because it saves a lot of money in the long run.

Disclaimer:  The above information is for illustrative purpose only. For more details, please refer to policy wordings and prospectus before concluding the sales.

This blog has been written by

S. Gopalakrishnan | Motor Insurance Expert | 40+ years of experience in insurance industry

A veteran in insurance industry. S. Gopalakrishnan is a name to reckon with in the field of reinsurance, he has headed the Reinsurance department and has rich experience in other fields of motor insurance. He loves to share his opinion on latest topics in the insurance industry and how he can help people in safeguarding their assets using insurance products.

Few other articles

• Factors affecting two-wheeler insurance premium
• Things to Know About Motorcycle Insurance in India
• How your driving record will affect your motor insurance premium

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