Compulsory insurance vital for SA - but management a challenge

Compulsory third party motor insurance – which the government has said is currently under review - should ultimately result in lower premiums for South Africa’s insured motorists. However, it is vital that the scheme is properly managed to ensure that motorists do not end up forking out even more than they do currently.

According to Wilhelm von La Chevallerie, Actuarial and Risk Services Director at CIB Insurance Solutions (CIB), any potential problems are likely to depend on the exact structure that the compulsory third party motor insurance scheme takes. “We would expect any project like this to have some initial teething problems; however, it is vital that for the long-term sustainability of such a scheme, it should not become an additional financial burden to the taxpayer.”

Von La Chevallerie says, however, that the administration and funding of compulsory third party motor insurance may also end up as the responsibility of the local insurance industry, as opposed to a scheme similar to the Road Accident Fund (RAF) being established.

Should the insurance industry carry the risk and administer this cover he cautions that policyholders may be exposed to opportunistic underwriting and premium fluctuations. “We do expect, however, that once the scheme is up and running and any issues have been ironed out that the consumer should be better off in the long-term.”

Whatever structure the compulsory insurance scheme does eventually take, it is a crucial development for South Africa’s motor insurance industry. A statement released by the South African Insurance Association (SAIA) earlier this year suggested that only between 30% and 35% of vehicles on South African roads are insured,meaning that of the 9.5 million registered vehicles, only 2.85 million are insured.

“Higher traffic volumes coupled with an increasing number of unroadworthy and uninsured vehicles, and a road-network that is under increasing pressure, means insured motorists in South Africa have been exposed to an increased risk and escalating costs.”

He says an increasing proportion of accidents involve uninsured vehicles, resulting in lower recoveries (and higher tracing expenses) on the part of the insurer. “Ultimately this leads to higher claims costs being borne by the insurers, which in turn puts pressure on loss-ratios and ends up in higher premiums for consumers.”

“The success of a compulsory third party motor insurance scheme will ultimately depend on the policing of vehicles and control of potential corruption of administration schemes. It remains in the government’s best interest to ensure that the insurance industry as a whole is sustainable, including motor insurance and effectively managed, compulsory insurance should do just that.”