How is Car Insurance Insured's Declared Value (Idv) Calculated?

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In India, as per the Motor Vehicles Act, it is mandatory to insure every vehicle being used on road. It is a major priority and responsibility for every car owner to insure his/her own car with a third-party liability coverage. It provides a safety net for the policyholder/car owner against any future liabilities that may arise from any unfortunate events like man-made or natural calamities.

Insured’s Declared Value (IDV)

Insured’s Declared Value (IDV) is basically the present market value of your car. In short, it is the maximum sum that the insurer should pay under the car insurance policy. IDV reflects the highest sum you can claim in case of any liabilities arising due to partial/total destruction or theft of your vehicle during the policy period.

IDV is calculated by the insurer based on the vehicle information provided by you before the policy period commences for the registered car.

Calculation of IDV

As per the India Motor Tariff, insurers use the following information to determine the IDV of your vehicle before insuring it:

• Registration details of your car
• Age of your car
• Place where your car was registered as mentioned on the vehicle registration certificate
• Date of purchase or registration of your car as mentioned on the vehicle registration certificate
• Type of registration depending on the vehicle’s ownership (Individual owner or company owned)
• Manufacturer, model and the make of your car
• Cubic capacity based on model and manufacturer information
• Vehicle description based on model and manufacturer information
• Ex-showroom price (the sum of the actual price of your car + state tax for your car)

The IDV for any car parts/accessories is fixed based on the ex-showroom price of that particular the car model.

The IDV is calculated using the below formula:

IDV = {[(Ex-showroom price) + (GST) + (Car accessories or parts that are not included in the ex-showroom price – depreciation of the these car accessories or parts)] – (Depreciation of car + Cost of registration + Insurance premium)}

In case the repair/replacement cost for a vehicle exceeds 75% of its IDV, the vehicle is identified as a constructive total loss (CTL).

Depreciation for IDV Calculation

Among other factors affecting IDV, depreciation plays a major role in determining the IDV for every vehicle. Of course, every car undergoes depreciation due to the usual wear and tear that occurs with the continuous usage over a period of time. Depreciation, in fact, comes into play from the time your car is driven out of the showroom.

The car insurance premium payable to the insurer is directly proportional to the IDV which means that as your vehicle ages, IDV will decrease resulting in a low insurance premium.

• Depreciation of a Car with Age

As per the Insurance Regulatory and Development Authority of India (IRDAI), the depreciation rate for a new vehicle will be at 5% during the first six months of purchase.

The below data exhibits the depreciation rates fixed by the IRDA for vehicles with respect to their increasing age:

• Depreciation of Car Parts for Partial Loss Claim

Depreciation of car parts come into play only when you claim for partial loss. The depreciation rates are applicable for the replacement of the following car parts:

What will happen if you declare a low IDV?

For those new to car insurance, the Insured Declared Value of the car is basically the current market value of the car. For example, if the car owner wishes to sell the car or the car is stolen, then in the case of selling the car, the car owner should ideally set a price around the current IDV of the car and if the car is stolen, based on the Insured Declared Value of the car or the current market value of the car, the insurer will decide how much compensation has to be paid to the policyholder. For a car that is less than 6 months old, the IDV is at 5%, meaning that if the car is stolen, the car owner is compensated 95% of the ex-showroom price of the car. For a car that is between 4-5 years, the IDV increases to 50%, which is half the value of the car when it was first bought. So if the car is stolen during this period, the compensation that will be extended to the policyholder will be just 50% of the price the car was initially bought for.

Now, policyholders need to know that the Insured Declared Value of the car also affects the premium of the policy that is set by the insurer. Now, if the policyholder declares an Insured Declared Value that the car actually is, the good side is that the insurer, due to the lower current market value, will set a premium that is lower as well. However, the drawback of setting the Insured Declared Value lower than it actually is that following a claim, the claim will be lower as well. As clearly highlighted above, the claim amount that the insurer will extend is subject to the IDV of the vehicle. So, if the policyholder declares a lower IDV than the actual value of his/her car, the claim will be lower and if the damages caused to the car are more than the claim amount, the policyholder will have to bear the expenses for the repairs from his/her own pocket.

Keeping the above-mentioned points in mind, often insurers offer premiums for cheaper than their competitors. In the process, the insurer reduces the IDV as well and offers the premium for cheaper. This will reduce the claim amount following an accident as well. When purchasing a car insurance policy, car owners should choose one that offers a good premium cost and an IDV for the car that is suitable as well. For cars that are beyond 5 years old, since the IDV will be more than 50% of the value of the car, the insurer will set the premium and the IDV based on the current condition of the car. In such instances, the car owner can negotiate on the premium set by the insurer.

What happens if the policyholder declares a higher IDV?

As already mentioned, the IDV directly affects the claim amount following an accident and the premium that the insurer will set for the car insurance policy. If the car owner sets a higher Insured Declared Value that the actual IDV of the car, then the premium that will be set will be higher as well. Insurers usually do not mind if the IDV set by the policyholder is either 10%-15% higher or lower than the actual. However, if the insurer agrees to the IDV set by the policyholder which should be around the acceptable 10%-15%, then the premium will be set higher and the claim amount following an accident will be higher as well, and will reduce the out-of-pocket expense of the policyholder.

That said, if the policyholder declares a much higher IDV than the actual IDV or current market value of the car, for example, an IDV 50% more than the actual market value of the car, then the value set will be regarded as fraud. In such cases, insurers will either reject any claim that the policyholder makes or even cancel the car insurance policy.

How the IDV matters during car insurance renewal

When it comes to renewing the car insurance policy, the premium that is set by the insurer is based on the Insured Declared Value of the car amongst several other factors. For cars, up to 5 years, the IDV is standardized as agreed by insurers across the country. It is 5% for cars less than 6 months old and up to 50% for cars between 4-5 years old. The lower the IDV of the car, the lower will be the premium, but the claim that the policyholder will receive following an accident or a mishap where the car has been damaged, will be lower as well. This means that if the expenses to repair the car exceed the claim amount, the policyholder will have to pay the balance amount from his/her own pocket. If the policyholder is renewing his/her car insurance policy and the car is more than 5 years old, then the policyholder will have to negotiate with the insurer on the premium that will be set for the car insurance policy. In usual cases, the condition of the car will determine the premium. However, since the premium is not completely based on just the Insured Declared Value (IDV) of the car, the policyholder can negotiate on a good enough premium. He or she should also ensure that the insurer does not reduce the premium less than what’s fair as it is already mentioned will affect the claim amount following an accident.

Importance of IDV

IDV, as mentioned before, is the present value of your car in the market. You can avail the best insurance depending on your car’s IDV. Hence, it is your responsibility as a policyholder to know the correct IDV, in case you are unaware of the correct IDV for your car, you might end up choosing an insurance plan with a low claim compensation.

Key point to remember when calculating IDV

• As the car owner, it is your primary responsibility when availing insurance to be aware of your car’s IDV.
• Never quote a figure that is lower to your original IDV. If your quoted figure is less than the original value, your insurance premium to be paid will be low which will result in less insurance coverage.
• Never quote a figure higher than your original IDV. A higher figure than the original IDV doesn’t guarantee you a higher price when you sell your car. Also, if the insurer finds out that you provided false information, your claim will be deemed invalid.