Shorter insurance periods could be a fillip to car subscription, leasing

The concept of car ownership in India has evolved in the recent years. In addition to purchasing or financing cars, customers now have the option to subscribe or lease, especially with more automakers entering the space. However, adoption of these newer ways of ownership has been slow. Industry experts believe that bringing the costs down is crucial, and this is where fine-tuning insurance offerings can help.

“If people are moving towards subscription or leasing models, we can construct a [insurance] product for a shorter time or based on the kilometres driven, keeping in view the IRDAI (Insurance Regulatory and Development Authority of India),” Raman Arora, COO, Reliance General Insurance (RGI), told Autocar India during a recent ‘Brobot Interact’ panel discussion on newer ways to own a car.

Currently, a three-year third-party insurance is compulsory for new cars, and even when it comes to own damage cover, customers are compelled to buy insurance for a whole year. A short-term option, at least for the latter, would allow people to purchase insurance only for the period they are subscribing or leasing the car.

Ashish Gupta, brand director, Volkswagen India, echoed similar views. “If we can bring down insurance costs for the [subscription and leasing] business, it will be better for the customer. It would be helpful if there were differentiated insurance rates for short-term subscriptions.”

However, this is something which is yet to get the regulatory nod. “IRDAI doesn’t allow short term, for now,” said RGI’s Arora.

Higher insurance renewals for subscription, leasing
With no possibility for differentiation, insurance premiums are currently uniform across the board, irrespective of whether a customer purchases, leases or subscribes to a car. “We do the pricing based on the vehicle, so it [ownership model] does not make much of a difference,” commented Arora.

However, for an insurance company, a lease or subscription is a better deal. “For subscription and leasing, the retention ratio of a vehicle is higher than in the case of a direct purchase because for the former two, the price [monthly fee] is inclusive of everything,” Arora said. “So, the lessor or the subscription company ensures it is renewed every year. From an insurance point of view, that is good.”

Hormazd Sorabjee, editor, Autocar India: For millennials, a car is increasingly becoming a mobility tool rather than an emotional expression, like it was in the past.

Tarun Garg, director, Sales, Marketing and Service, Hyundai: We are doing about 450 subscriptions every month.

Ashish Gupta, brand director, VW India: It would be helpful if there were differentiated insurance rates for short-term subscriptions.

Raman Arora, COO, Reliance General Insurance: With people moving towards subscription or leasing, we can construct a product for a shorter time. However, IRDAI doesn’t allow that, for now.

Both subscription and leasing require the customer to pay a monthly fee which covers all costs, including insurance and maintenance, except fuel costs. Then, the customer isn’t required to make a down payment up front, nor is he responsible for reselling the vehicle (the subscription or leasing company handles that). However, there are a few key differences between the two models.

Subscription allows a customer to own a vehicle, for anywhere from a month, up to a few years. The registration certificate generally carries the name of the subscription company, and the vehicle comes with black number plates. Leasing, on the other hand, is for a longer period. The vehicle also carries a white registration plate and is in the customer’s name, with the leasing company simply acting as the hypothecator or lessor.

Shorter subscription plans more popular
But which of these newer ownership models is proving to be more popular? Shedding some light, Tarun Garg, director of sales, marketing and service, Hyundai Motor India, said, “Till about two years ago, 10 percent of the subscriptions were annual and 90 percent were monthly. But this year, not a single annual subscription has happened [for Hyundai]. 100 percent of our subscriptions are now monthly – for one, three or six months.”

As such, customers don’t want to be locked in for long terms. They seek flexibility in ownership and a want to remain “asset-light”, explained Garg. He added that the trend has recently picked up due to COVID-19, where people are moving between cities and switching to a work-from-home arrangement in many cases.

Still, the number of customers opting for the newer ways of car ownership remains relatively low. “We [Hyundai] are doing about 450 subscriptions every month,” revealed Garg. In comparison, the Korean automaker sells over 40,000 vehicles each month.

The company’s sales and marketing boss believes that the numbers should improve as Hyundai expands the availability of its subscription services. “Right now, our subscription is available in only 22 cities. But, as we go along and add more cities, I think the numbers will pick up.”

Weighing in, Gupta commented, “If we want to drive this business model, the first thing we have to do is create awareness, because it is not very clear to the customers.” He added that companies also need to bring down subscription prices to make the prospect more attractive. Short-term insurance, in that case, could provide the much-needed fillip.

Leasing yet to catch on
While subscriptions still seem to be getting some attention from consumers, leasing is yet to gain any traction. “Leasing is still limited to SMEs [small and medium enterprises] and corporates because the tax benefits are only available to them,” said Garg. For reference, employers can deduct the company lease from an employee’s pre-tax income which helps in tax savings.

Personal lease, on the other hand, is another story. “In India, one area which is still not being developed is personal leasing because there are no tax incentives. Going forward, if tax incentives come that way, and you’re allowed to show the monthly fee for leasing as an expense, it will open up the market in a big way,” stated Garg.