Call for compulsory third party insurance grows
Minister of transport, S’bu Ndebele, is the latest to add his voice to the ‘viability of short-term insurance: motor’ debate. According to a recent article on Fin24.com, titled Car Insurance may become Mandatory, “government is considering making third party insurance compulsory for all drivers using public roads.” The minister was responding to a Democratic Alliance parliamentary question which raised concerns over the disappointing short-term insurance statistics. Currently 65% of the appromiate 9.5 million vehicles using South Africa’s roads are uninsured. The burden of ‘covering’ these uninsured vehicles is currently carried by a shrinking pool of insured drivers and dwindling margins on short-term insurers’ motor books.
His comment follows hot on the heels of a recent Sake 24 article that suggests certain of the country’s short-term insurers will scrap motor insurance altogether. Insurers have been struggling to turn consistent profit on their motor books for some time now. Their motor business is hampered by increasing accident claims and inflation-plus increases in vehicle repair costs. There are a number of factors contributing to rising accident numbers, including more road users, poor driver education, badly maintained vehicles, the shocking state of the country’s road infrastructure, and a general disregard for traffic law. The reasons for soaring repair costs are more complex, but include motor vehicle manufacturers trying to bolster flagging vehicle sales profits by hiking prices on original equipment spares and accessories.
Easing the insurance burden
Will third party insurance ease the insurers’ burden? Let’s consider an accident involving two motor vehicles. Vehicle A is comprehensively insured by FullComp Insurers, while Vehicle B is uninsured. If Vehicle B causes the accident, FullComp will have to cover the damages to its policyholders’ vehicle before embarking on the near impossible process of claiming damages from Vehicle B’s driver. The situation would have been different if Vehicle B’s driver had taken out third party insurance. This insurance typically covers the accident damage you cause to another vehicle during a motor vehicle accident. If Vehicle B had been insured for third party damages, then FullComp insurers wouldn’t have had to cover the damages to Vehicle A.
Fin24 continued: “Ndebele said [mandatory third party insurance] would require careful consideration of several factors, including the financial status of motor vehicle owners and the present fuel levy system.” The South African Insurance Association (SAIA) is currently exploring ways to improve conditions in the short-term insurance space, with compulsory third party insurance one of many items on their agenda. “We have been working with the RTMC on the issue for a few months already,” said Viviene Pearson, SAIA Manager: Motor. We welcome the minister of transport’s statements and will certainly seek an audience with him to further discuss the matter.
Tough to implement
Although mandatory third party insurance makes sense it’s going to be tough to implement. There have been some suggestions this insurance would be sold alongside the annual vehicle licence. “We are at this stage considering all sorts of options,” said Pearson, “but it’s going to be important to find the most appropriate way to implement the solution to accommodate South Africa’s unique circumstances.” There are a number of country’s worldwide that successfully collect this insurance at the licensing stage. “One of the challenges is ensuring people don’t just get the compulsory insurance at licensing stage, and then let the insurance lapse for the rest of the year,” she said. Perhaps we’ll follow the United Kingdom example and charge an annual insurance premium for third party insurance. Whatever final solution is adopted, you can be sure enforcement will play a big part.
We asked Pearson about the ministers comments that insurance would be charged ‘with due consideration for the financial status of the vehicle owner’. “Insurance premiums are and should be based on risk and cost factors and should be priced as such in order for this type of product to remain sustainable,” said Pearson, “I therefore cannot personally see how one’s financial circumstances can play a role in this.” Commonsense issues of affordability aside, the third party insurance premium would have to be based on factors such as driver age / experience and vehicle type. “The SAIA, with the assistance of an industry actuarial team, is currently busy investigating a potential premium for compulsory third party motor property insurance based on calculations to include all sorts of data,” observed Pearson. These statistics contain detailed information about the total car park, national accident figures and other relevant information.
Another tax on insured drivers
Depending how compulsory third party insurance is implemented it could become an additional burden to comprehensively insured drivers. The final solution could require all drivers (whether insured or not) to sign up for third party – and then take comprehensive insurance over and above the third party solution. In this case we’d have a two-tier insurance pool, with insurers possibly remiss in passing third party ‘savings’ to their comprehensively insured pool.
“At this stage, anything is possible as we have not yet explored all options, and we are not aware of any firm decisions by the authorities,” said Pearson. “It would make sense to put a system in place that will enable those who only want to have the compulsory third party motor property insurance product to be able to acquire this, and those who wish to include it in their comprehensive motor insurance package to be able to do so.”
Editor’s thoughts: Will South Africa forge ahead with compulsory third party insurance? Given the sorry state of most insurers’ motor books we cannot formulate too many arguments against... The real challenge will therefore be to create an equitable and enforceable third party insurance system. Do you think insurers will pass ‘third party’ savings on to their comprehensively insured clients? Add your comment below, or send it to [email protected]
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