Motor Insurance business in India is governed by the All India Motor Tariff which lays down the premium rates, terms and conditions.

The main factors taken into consideration for rating in India are as follows

The type of vehicle

Its cubic capacity or gross vehicle weight and its carrying capacity.

There is no doubt that heavier vehicles are more exposed to accidents since the resultant damages they incur are more. Similarly, vehicles with higher carrying capacity expose more passengers to risk. Therefore heavier vehicles attract higher premium rate. In private cars, taxis and motor cycles, the factor is the cubic capacity. The more the cubic capacity, the higher the premium rate. Whereas in goods-carrying commercial vehicles and passenger-carrying commercial vehicles, the criteria are gross vehicle weight and passenger carrying capacity respectively.

The value of the vehicle

The premium rate is applied on the value of the vehicle to arrive at the premium payable. It is the owner/insured who has to select a correct value of the vehicle and declare the same for insurance. This value is known as the Insured's Estimated Value (IEV) in motor insurance and represents the Sum Insured.

Normally, this value is arrived at by considering the age of the vehicle and its present purchase price. A Maruti 800 was purchased in 1998 for Rs.1,80,000/- Considering the conventional 10% depreciation each year and the present purchase price of a similar vehicle at Rs.2,00,000/- the IEV for year 2000 is

Rs.1,80,000.00
less 20% of Rs.2,00,000 = Rs.40,000.00
IEV = Rs.1,40,000.00

However, this is not sufficient for deriving the correct IEV of the vehicle in terms of motor insurance.
In motor insurance, the basis for payment of claims, is the market value of the vehicle at the place and time of loss. This market value may be understood as, the price that the vehicle would fetch in the second-hand market.
For certain vehicles, there is a good demand in the second-hand market. Maruti is one of them. The 1998 model mentioned above may fetch a price of say, Rs.1,50,000. In such situations, the correct IEV for the Maruti of 1998 model should be Rs.1,50,000.

Now take the case of a Premier Padmini car of 1998 model. The purchase price in 1998 was say, Rs.1,80,000/- The depreciated value in year 2000 works out to Rs.1,40,000/- But, the second-hand value would be at most Rs.30,000, since it has virtually no demand in the market. In this case, the correct IEV should be Rs.30,000/- only.

It is not worthwhile to insure your vehicle at a higher value since that will increase the premium payable but, in case of total loss, only the market value would be payable.

In motor insurance, the IEV is the limit of liability per accident and not for the entire period of insurance. In cases of partial loss or losses which may be made good by repairs, there is no limit to the number of accidents in any period of insurance.

Suppose the Premier Padmini car, as described above, claims for two accidents in the year 2000, the first for an amount of Rs.20,000/- and the second for Rs.15,000/- under its insurance policy with IEV of Rs.30,000/- Both these claims can be recovered from the insurance company, since their respective values are within the limit of IEV, irrespective of the fact that the insured in this process recovers more amount during the period of insurance than he was insured for.

However, if the vehicle is totally lost or damaged and cannot be repaired, the insured would be paid the market value or IEV, whichever is less.

It is very important to select a correct IEV for insurance. There is a tendency of motor vehicle owners to declare a lower value for insurance to reduce the premium expenditure. Although, insurance companies check the IEV for its sufficiency before accepting the insurance, this is not a correct practice as the insured is exposed to a greater loss in case the vehicle is totally lost or damaged.

The use of the vehicle

Risk exposure varies in relation to the use the vehicle is put to. Private cars are lesser exposed than taxies, as the latter is used extensively for maximum revenue. Taxies, therefore attract a higher premium rate. Similarly, goods carrying vehicles which are used as private carriers and transport only their owners' goods attract a lower premium, than those used as public carriers for transporting goods for hire. 

The geographical area of operation

The area of operation of a vehicle also has a direct bearing on the premium rate. This is so because, certain areas of operation are more congested with high densities of population and road traffic than others and pose higher exposure to accidents. For this purpose, the tariff differentiates two zones in India, i.e., Zone A & Zone B, for private cars and taxies. Zone A represents the Madras region and Bombay region (excluding Bombay city) and Zone B represents the Calcutta region, Delhi region and Bombay city. In Zone B, the densities of population and road traffic are more and hence attract a higher premium rate.

Such differential rating does not apply to commercial vehicles such as trucks and buses, as these vehicles normally travel throughout India for their operation. However, a discount is allowed on the premium for commercial vehicles used as contract carriage, school buses, public and private buses used for carrying passengers/workers and operates within a radius of 50 kilometres from the city limits.

The claims experience

Unfavourable claims experience is obviously a bad risk. The tariff has adopted a system called the Bonus/Malus Clause, to give discounts for good claims experience and a loading for bad experience. The claim experience of expiring year's policy is the basis for allowing discount or charging a loading.

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