What is depreciation?
Depreciation is the decrease in the value of an asset over time. Depreciation refers to the loss in the value of your bike due to regular wear and tear over time. In the context of two-wheeler insurance, it helps the insurer determine your bike's current market worth. Like all machines, Two-wheelers undergo wear and tear during their lifetime, which reduces their market value over time. For insured two-wheelers, policy providers offer a complete list of depreciation rates (as per the Indian Motor Tariff) for different stages during the two-wheeler’s lifetime.
In simple terms, depreciation is the key factor that assists in determining Insured Declared Value (IDV) while also assisting in determining the policy premium.
What is insured declared value (IDV)?
IDV plays a key role in chalking out the maximum sum assured in case of theft or damage to your two-wheeler. The maximum value payable by the insurer in case of an accident, theft or damage of a two-wheeler is called the Insured Declared Value or IDV. Simply put, IDV is the current market value of your two-wheeler. If your two-wheeler meets with an accident, then you will be given the IDV as compensation by the two-wheeler insurance company. This compensation gets reduced as the age of your two-wheeler increases. The premium you pay for your vehicle insurance is directly proportional to the IDV.
How do we calculate insured declared value (IDV)?
A very important point to remember here is that IDV is not calculated on the price you have paid for purchasing the vehicle. Instead, it is calculated considering the market value of the two-wheeler on the commencement of the policy. This value varies largely with time.
Ideally, you should get your vehicle insured within six months of the purchase to get the maximum IDV. The older your vehicle, the lesser will be the IDV and the premium.
Scroll down to understand the insured declared value (IDV) calculation through a formula.
Insured declared value (IDV) = {Bike's current market value - depreciation costs} + {Accessories cost - depreciation value of accessories}
To fully comprehend the insured declared value (IDV), you must first understand the influence of depreciation in percentage on the age of a two-wheeler.
As per the Indian Motor Tariff Act, the depreciation on the bike will be such:
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Vehicle’s lifetime
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Percentage of depreciation
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Less than six months
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5%
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Exceeding six months but less than a year
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15%
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Exceeding one year but less than two years
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20%
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Exceeding two years but less than three years
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30%
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Exceeding three years but less than four years
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40%
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Exceeding four years but less than five years
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50%
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If your two-wheeler is five years old or more, you would still get the IDV amount, depending on the condition of your two-wheeler’s body parts and its serviceability. Even if your two-wheeler is an obsolete model, you will still be able to get its IDV value through a mutual agreement with your insurance company. You can also use an IDV calculator to calculate your bike's insured declared value.
Depreciation in IDV rates
Ideally, depreciation is adjusted on the vehicle’s selling price listed by the manufacturer. If a vehicle is not more than six months old, the deprecation value is 5%.
This goes up periodically and reaches a value of 50% of the market price in 4-5 years. If the two-wheeler is more than five years old, the insured declared value (IDV) is calculated by an agreement between the insurance company and the policyholder.
While insuring your two-wheeler, the right amount of IDV is the first step towards ensuring an infallible financial backup. So, get your ride insured and ride without the fear of any financial roadblocks.
Factors affecting insured declared value (IDV)
- The type of bike influences its insured declared value (IDV). In most cases, the IDV of a daily commuter bike is lower than that of a sports bike. Furthermore, the IDV will be significantly higher if the bike you are riding is equipped with high-end features.
- The purchase location also influences your bike's insured declared value (IDV). The ex-showroom price of the vehicle varies from one city to the other.
- As discussed previously, depreciation plays a crucial role in determining your bike's insured declared value (IDV). As such, the two similar bike models with different manufacturing years will have two different IDVs.
- When calculating your bike's insured declared value (IDV), the accessories installed in the vehicle are also taken into consideration. Note that the depreciation of the accessories is also considered while determining the IDV.
- The two-wheeler insured declared value (IDV) is also determined by the kind of fuel your bike is consuming.
- Lastly, the kind of bike insurance policy and its tenure also play a crucial role in deciding your bike’s insured declared value (IDV).
Significance of insured declared value (IDV)
If you believe that the main purpose of insured declared value (IDV) is to assist you in determining the resale value of your two-wheeler, you are mistaken. The prime objective of IDV is to calculate the policy premium. It also determines the sum that the insurer will pay if your bike is irreparably damaged or stolen. Keep in mind that a lower IDV translates to a lower policy premium, whereas a larger IDV equates to a higher policy premium. Therefore, you should keep your IDV as close to your bike's present market value as possible.
Impact of stating wrong insured declared value (IDV)
While calculating insured declared value (IDV), the invoice value is not taken into consideration. Instead, it is calculated based on the current market price of the specific bike model after considering depreciation. To save on the premium, many people declare a lower IDV. However, if you do so, the insurer will compensate you with a lower amount at the time of claim settlement. This is because the resale value in the form of IDV is much lower than its actual market value. Similarly, declaring a higher insured declared value (IDV) holds no logic. This is because, at the time of claim settlement, the insurer considers the age and depreciation of the bike. A higher IDV will only add to the premium value.
What happens if I sell my two-wheeler?
If you sell your two-wheeler to another person, then your insurance also gets transferred to that person, and the IDV will continue as previously established. However, the same insurance cannot be transferred to a different two-wheeler, and you need to buy fresh insurance for a new bike.