What Is The Impact Of Scrapping A Car On An Insurance Policy

An old, scrapped car is not only a threat to the environment but also to the driver and passengers. With an intent to remove these cars Government of India has recently introduced a car scrappage policy for cars that fail to meet the fitness standards. To know more about the policy and the effects of insurance policy on scrapped cars, read on.

Under the vehicle scrappage policy, cars aged 15 years and above must pass the mandatory fitness test. Vehicles that pass the test get a fitness certificate and are re-registered for another 5 years, while those who fail would be scrapped. A scrapped car is extensively damaged, unrepairable and its only worth is the weight of its constituents components such as rubber, frame, glass, iron etc. The vehicle scrappage policy assists in the process of phasing out these old, obsolete cars.

Does Scrapping A Car Impact car Insurance?

An old and obsolete car is a liability for the motor insurance companies, therefore attracting a higher premium for the car owner. But if you choose to scrap your car, the premium on car insurance policy decreases. Here is how scrapping impacts your car insurance.

Old and damaged cars contribute to a higher incurred claim ratio (ICR). ICR is the ratio of total claims settled to the total premium received during the year. Scrapping old cars decreases the incurred claim ratio.

Scrapping old cars allow manufacturers access to industrial products such as rubber, plastic, steel, copper, etc. They can further use these materials in manufacturing a new vehicle, which would reduce the car's overall price. Lower manufacturing cost decreases the Insured value (IDV) of the car, which further decreases the premium of the car insurance policy.

Old and damaged cars are dangerous on roads and have significantly increased third party insurance claims. This scrappage scheme has reduced the third party claims as old and damaged cars are now disposed off the roads.

What effects does scrapping have on the claim amount of the totalled car?

A totalled car is a car whose repair costs are higher than the car's market value. If you have met with an accident and have a totalled car, the motor insurance company may offer you to buy the car. In this case, you will receive the insured value of the car. If you choose to scarp your car, the insurance company pays you the IDV and the price of its parts from the junkyard. Therefore scrapping your totalled car is more beneficial than keeping it.

Should you cancel car insurance before scrapping it?

Before scrapping your car, it is mandatory to cancel the vehicle's registration certificate (RC). Once the car is scrapped, you can cancel the car insurance policy. Cancellation of RC is mandatory as per Indian motors law as this prevents misuse of any car document. The insurance company will return your insurance premium as per the pro-rata basis; however, the policy cannot be cancelled if you have raised a claim in the current year.

Final word

In India, car scraping activity is authorised, and old vehicles need to pass the fitness test to re-register. In case you have an old car that has not passed the fitness test, remember to inform your motor insurance company before getting it scrapped.