Insurance Cover For Auto Recall Risk Protection

According to the ongoing sessions of the Parliament, the new Motor Vehicle Act is likely to make auto recalls compulsory in the domestic market, thus, auto part firms and car companies are likely to buy insurance policies for protection from risks of product recall. In India, very few firms have opted for such an insurance cover, in comparison to mature auto markets of US and Europe.

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Auto expert Abdul Majeed of PricewaterhouseCoopers India informed that till November about 29 million vehicles were recalled globally except from India, because the country does not have any such policy.

In July 2012, the Society of Indian Automobile Manufacturers (SIAM) introduced voluntary code with an intent of enticing vehicle makers for recalling defective cars. This resulted in voluntary recalling of about 600,000 cars and utility vehicles by the auto makers in India.

The auto recall law, to be passed by the Government, will increase the expenses of auto parts suppliers and car makers by penalizing them for manufacturing and selling defective vehicles.

India’s largest car maker by sales, Maruti Suzuki India Ltd, incurred an expense of Rs. 100.9 crore in the financial year 2014 over product recall and warranties, as mentioned in the company’s annual report. It also combined other expenses amounting to Rs. 65 crore. Compared with last year, the company’s sale, including exports slimmed 1.4% to 1.15 million units.

According to the automobile recalls, the repair or replacement cost of parts and sub-systems that might be a risk to car occupant’s safety is taken care by the car manufacturer. General insurers are delighted with the growing opportunities they are likely to experience with the increasing expenses on recall, but surely the companies would enter only after a careful consideration of risk factors.

Chairman and Managing Director of the New India Assurance Co Ltd, G, Srinivasan informed that the company will require to rework on the terms and conditions since the strictness of norms would increase after the legislation is passed. He added that the company would review the quality control, practices and standards of the firm before underwriting the risks of this particular product segment.

Chief Financial Officer of Motherson Sumi System Ltd, G.N. Gauba informed that the company is covered for recall and liability and draws 85% of its revenue from outside India. Chief of underwriting and claims, Sanjay Datta of ICICI Lombard General Insurance Ltd informed that with the growing demand and the introduction of legislation, the share of such insurance is sure to increase from the current 1%. He added the reinsurance approach will be accepted by most of the insurers once the market picks up auto recall.

Vice President of Mahindra and Mahindra Ltd’s customer care at the automotive division said that currently the average online rate of product recall insurance is 2%–3% of AOA (any one accident) which would be reconsidered after the Government announces the policy.

Abdul Majeed of PwC added that it would be better for the vehicle makers and suppliers to opt for insurance cover to alleviate risks that are likely to affect companies with the introduction of the new policy.

(Source: This article has been adapted from the article "Auto firms plan insurance cover against increasing recall costs" that appeared on December 09, 2014 in livemint.com.)