Mandatory motor vehicle insurance – a saving grace?

Following the poor performance of the motor insurance industry in 2013, the overall sustainability of it is trending news. Weather events, the devaluation of the Rand and changing driver behaviour have added pressure to an already unsustainable situation, says Vuyo Rankoe, Excutive Head of UMA Solutions at Centriq Insurance.

With less than 30% of costs recovered from uninsured drivers on the roads, the South African Insurance Association (SAIA) said that one of their aims is to engage with the South African Government to introduce compulsory third party motor insurance to all.

Reducing industry pressure

By introducing third party insurance to all, you are increasing the number of people contributing to the premium pool. This will take some pressure off the relatively small number of contributors, when compared with the large number of uninsured drivers on the roads,

It must, however, be noted that the Rand value impact of introducing compulsory third party motor property insurance is complex to determine as we would be introducing risks that have not been profiled into the risk pool before.

Should the new entrants to the pool however present higher risks than the individuals who are currently insured, it may increase the cost of the pool, leaving the system in a worse off position. But, should the risk profile of the previously uninsured market be a positive one, we can expect a positive outcome overall.

Potentially, the introduction of compulsory third party motor property insurance could result in a 5% to 20% reduction in premiums for individuals who are currently insured.

Other mitigating factors

More complexities that must be considered when we look at the potential cost of compulsory insurance to the consumer, includes the different levels of risk inherent in a specific group of individuals.

Urban drivers usually have a higher risk of incidents than rural drivers due to the number of vehicles per square kilometre on the roads. Urban infrastructure, however, is usually better equipped to handle the large traffic volume on the roads.

Another aspect that should be considered is whether it would be equitable to charge one price to both set of consumers.

The pricing of this may vary depending on where the vehicle is registered and used, with current price estimates ranging between R50 and R150 per month.

Another question that should be asked is if government will be able to successfully handle the challenges that come with the administration and control of compulsory third party motor insurance, seeing that the concept of compulsory third party motor insurance already exists by way of the Road Accident Fund’s (RAF) third party bodily injury insurance.

If not, they should opt for a different delivery mechanism such as the insurance industry. However, the insurance industry would require some form of governmental support or rather a public and private sector partnership in the execution thereof.

Implementation is easier than you think

A simple mechanism could be making third party motor insurance a pre-requisite for the renewal of a licence disc, and the constant matching of the e-natis database with the records of the insurance industry.

With that said the overall benefits of utilising the insurance industry as delivery vehicle, is that the industry is highly competitive. As such, consumers will get the best service at the best price. Insurers are also better equipped to price the underlying risk of individuals.

The downside to introducing third party motor insurance is that individuals may see it as just another form of tax that government wants to raise, and as such, just an additional expense to consumers of an already stretched economic system.

The value-add, however, is that insurance cover would alleviate the expense that would have otherwise been borne by the previously uninsured car owner, such as repairing your own vehicle following accidental damage caused by another uninsured vehicle.