What Is IDV, And How Does It Affect Car Insurance?

Despite the relaxed regulations and employees getting back to offices for work, we see fewer vehicles on the road compared to pre-COVID times. It is mainly due to people migrating to their hometowns and a few companies still following work-from-home norms. While this is the case, the automobile industry has started witnessing some momentum towards the end of 2020 owing to the festive season. This has directly resulted in an increased demand for motor insurance. 

When one looks for insurance for a new car or renews motor insurance, multiple options are available with lower as well as higher premium. Usually, a customer prefers to opt for products that are available at a lower cost, but in the case of motor insurance, a lower premium can come at the cost of being offered a lower IDV (insured declared value) for your vehicle. 

So, what is an Insured Declared Value or IDV of a vehicle? IDV reflects the market value of the car.  IDV also determines the maximum claim amount that an insurance company will pay for any damages caused. The IDV value is usually the price paid for the vehicle minus the depreciation over the years.

IDV is one of the most significant elements that an insurance company considers while calculating the premium. It is calculated based on the IRDAI regulations for the first five years of the car. It is calculated based on the depreciation, and it is often correlated to the current value of the car. Hence, IDV and the car insurance premium are linked. For instance, if the IDV of the car is higher, then the car insurance premium goes up. Similarly, as the vehicle ages and IDV depreciates, the premium also decreases. Below are the factors that determine the IDV of the vehicle:

• Age of the Car: One of the main factors that determines the IDV of the car is the age of the car as IDV represents the current market value of the car. This means that the older the car, the less the IDV and vice versa.

• Make and Model of the Vehicle: The car parts and expenses depend on the model and make of the vehicle, and hence it will affect the car’s IDV. For example, the IDV for a premium car will always be higher than for a utility vehicle or a hatchback.

• Registration Details: The IDV of a car registered in a metro may be less than in a tier-II city. Hence, the city of registration has an impact on its insured declared value.

• Depreciation: The standard depreciation of the vehicle from the day of purchase is calculated based on Indian Motor Tariff.  The percentage of its depreciation increases with each year. As the vehicle parts depreciate in value it reduces the IDV also.  as the vehicle ages and IDV depreciates, your premium also decreases.

While it is important to check the insured declared value of the vehicle while buying an insurance, it is also important to know how IDV will benefit us during claim. While claiming insurance, the compensation is determined based on the value of your car. For instance, repair or replacement expenses will also be based on the car’s value. Also, in case of theft or damage beyond repair, the compensation one receives for the loss will be the amount equal to the IDV. Therefore, it is important to make sure that the IDV mentioned reflects the car’s value. 

Low premiums in insurance can be tempting, but in reality, the low premium amount can be a result of the low IDV declared in the policy.  Especially in case of new cars, premium cars, cars registered in higher-risk locations the expenses related to any risks can be higher. Similarly, in the case of old vehicles which are more than 5 years old, cars that are not used much, or people who prefer to sell the car sometime after purchase it is better to go with a lower IDV as the risk attached is comparatively less. Hence it is always advised not to go for a higher or lower IDV but the right IDV.

IDV also plays a significant role in case one wants to sell the car. Along with factors like usage, past car insurance claims experience etc. a vehicle with higher IDV will get a get a higher price. The going rate of the car is usually the insured declared value. Hence, it is one of the most critical factors that decide the car’s value during resale and the right amount of compensation for loss against the claim made.  In simple terms, Insured Declared Value is the foundation of car insurance as it not only decides the premium of the vehicle but also the market value of the car.