Public Disclosure Authorized
Public Disclosure Authorized
Public Disclosure Authorized
Public Disclosure Authorized
62516
Motor Third-Party
Liability Insurance
Serap Gönülal
PRIMER SERIES ON INSURANCE
ISSUE
16, SEPTEMBER 2010
NON-BANK FINANCIAL
INSTITUTIONS GROUP
GLOBAL CAPITAL MARKETS
DEVELOPMENT DEPARTMENT
FINANCIAL AND PRIVATE SECTOR
DEVELOPMENT VICE PRESIDENCY
www.worldbank.org/nbfi
Motor Third-Party
Liability Insurance
Serap Gönülal
primer series on insurance
issue 16, september 2010
non-bank financial
institutions group
global capital markets
development department
financial and private sector
development vice presidency
www.worldbank.org/nbfi
ii
Motor Third-Party Liability Insurance
THIS ISSUE
Author Serap Gönülal is a senior financial sector specialist at the World Bank, where she has
worked since 2000 in the non-life insurance field. She has over twenty six years of experience
in financial market development, regulation and supervision and her expertise is in insurance
and pension sector regulations, supervision and product development. Before joining the World
Bank, she worked for the Undersecretariat of the Treasury in Turkey from 1983 to 2000, and was
responsible for regulatory development and prudential supervision of insurance, reinsurance,
intermediaries (broker, agent, loss adjuster and expert) and private pension companies.
In addition, Serap was also the project initiator and manager for the introduction and
implementation of catastrophe risk insurance in Turkey after the earthquake of 1999, as well as
project coordinator and implementer for the standardization and development of the Actuarial
Profession in Turkey. She has written numerous reports and technical papers on insurance and
capital market development issues with the World Bank and the Turkish Treasury.
Series editor Rodolfo Wehrhahn is a senior insurance specialist at the World Bank. He joined
the Bank in 2008 after 15 years in the private reinsurance and insurance sector and 10 years in
academic research. Before joining the World Bank, he served as President of the Federation of
the Interamerican Insurance Associations representing the American Council of Life Insurers.
He was board member of the AEGON Insurance and Pension Companies in Mexico, and was
CEO of reinsurance operations for Latin America for Munich Reinsurance and for AEGON.
For questions about this primer, or to request additional copies, please contact:
insurancesector@worldbank.org.
The Primer Series on Insurance provides a summary overview of how the insurance industry
works, the main challenges of supervision, and key product areas. The series is intended for
policymakers, governmental officials, and financial sector generalists who are involved with the
insurance sector. The monthly primer series, launched in February 2009 by the World Bank’s
Insurance Program, is written in a straightforward, non-technical style to share concepts and
lessons about insurance with a broad community of non-specialists.
The Non-Bank Financial Institutions Group in the Global Capital Markets Development
Department aims to promote the healthy development of insurance, housing finance, and
pension markets, and to expand access to a broad spectrum of financial services among the
poor. These markets provide opportunities for household investment and long-term savings,
and can buffer the poor against the risks of sickness, loss of breadwinner, catastrophic events,
and other misfortunes.
© 2009 The International Bank for Reconstruction and Development/The World Bank
1818 H Street, NW
Washington, DC 20433
Internet: www.worldbank.org/nbfi
E-mail: insurancesector@worldbank.org
All rights reserved.
First printing June 2009
This volume is a product of the staff of the International Bank for Reconstruction and Development/The World
Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of
the Executive Directors of The World Bank or the governments they represent.
The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgement on the part of The
World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.
Cover and publication design: James E. Quigley
Cover illustration: Imagezoo/Corbis
Contents
Introduction ................................................................................................... 1
The Main Components of MTPL ................................................................ 3
A.) Legal structure: Liberalization, regulation or deregulation ...........4
B.) Actuarial Methodology ....................................................................6
Calculation of Premiums and Reserving.........................................6
Actuarial Approach of MTPL Premiums ........................................8
C.) Contingency Reserving (Guarantee Fund)....................................10
D.) Claim management and information service ...............................12
E.) Reinsurance ....................................................................................14
The Role of Competition in MTPL Insurance ......................................... 15
A.) The Centrally Priced Option ..........................................................16
B.) The Free-Market-Priced Option ....................................................17
Where the Free Market Succeeds ...................................................17
Where Competition Fails to Encourage Improvements Directly ......... 19
Annex I—Written Premiums in Select Countries .................................. 21
iii
Introduction
Serap Gönülal
Motor Third Party Liability Insurance (MTPL) ensures that damage to
third party health and property caused by an accident for which driver
and/or owner of the car were responsible is covered. A policy may be
taken out by the owner of a vehicle or by a lawful possessor authorized
by the owner on behalf of the owner.
Compulsory MTPL Insurance is a financial protection system built
to prevent any grievance that third parties could face, due to lack of
solvency of first party who caused bodily injury or property damage
following any event related to a Car Accident.
Motor insurance is generally measured non-life insurers’ strongest
class of business in terms of premium volume. In most markets, it is
characterized by high competition and cyclical fluctuations in results.
Non-life insurers’ motor result is thus likely to have a particularly
strong impact on the overall result. In most countries, MTPL insurance is compulsory in order to protect the public. World Bank studies
in Africa, Central Asia, and Europe have shown that motor insurance
premiums represent at least 30 percent of all non-life premium income
(Annex 1). This phenomenon may be explained by the rapid rise of
motor fleets. MTPL insurance has been introduced in the formerly
centrally planned economies only in the past decade, but it is poorly
understood. Motorists are inclined to view it as a form of tax that they
are at liberty to evade, rather than as a protection against their personal
liability—a concept that is not familiar to the general public.
According to the first major report on road injury prevention
jointly issued by the World Health Organization (WHO) and the
World Bank, road traffic injuries are a huge public health and develop-
1
2
Motor Third-Party Liability Insurance
ment problem, killing almost 1.2 million people a year and injuring
or disabling between 20 million and 50 million more. Both WHO and
World Bank data show that, without appropriate action, these injuries will rise dramatically by 2020, particularly in rapidly motorizing
countries. Over 90 percent of the world’s fatalities on the roads occur in
low-income and middle-income countries, which have only 48 percent
of the world’s registered vehicles.1 Although data on the costs of traffic
accidents are sparse, particularly for low- and middle-income countries, these injuries clearly have an enormous economic impact on individuals, families, communities, and nations, costing countries between
1 and 2 percent of their gross national product. In addition, there is
the heavy and tragic burden on those directly affected, physically and
psychologically, as well as on their families, friends, and communities. According to the WHO’s 2004 World Report on Road Traffic Injury
Prevention, health facilities and their often meager budgets are greatly
overstretched in dealing with survivors of traffic accidents.
In some countries, the insurance industry shares responsibility for
preventing road injuries, and organizations funded by the insurance
industry make a valuable contribution to road safety. For example,
Folksam in Sweden and the Insurance Institute for Highway Safety in
the United States provide objective information about the crash performance of new cars and other safety issues. Data is collected by such
groups as the Finnish Insurers’ Fund and by TRAMER, the Turkish data
collection system, both of which investigates every fatal crash occurring nationally, carries out safety studies, and provides information to
the public.
Motor insurance has the potential to be a powerful tool in the
promotion of personal responsibility. If communicated effectively,
the link between the consequences of causing an accident and the
economics of paying for those consequences will of itself gradually lead
to improved driving. Many more developed economies work extensively with bonus-malus premium pricing, which has a dramatic effect
on making the driver feel responsible for his or her own driving. In
developing economies, this is rarely a practical option at the individual
level, but price variations by type of vehicle (and perhaps by location)
can play a valuable part in bringing home the principle of the “user
pays.” Similarly, compensation that reflects the behavior of the individual can be harnessed to improve behavior—if the system pays benefits on a no-fault basis, there is no incentive to wear a seatbelt.
While it is not within the power of insurers to change the state of
roads and bridges, standardization of methods, both in establishing
histories and in assessing claims, has a certain beneficial impact
1
Global status report on road safety 2009
Motor Third-Party Liability Insurance
on both the insurer and insured. Databases permit more accurate
tracking in cases of fraud, while simplifying the assessment of imminent compensation claims by insurance companies. In the absence of
an insurer of last resort, i.e. when insurance companies are obliged to
underwrite, this factor is especially important, as it also might stabilize
the development of premiums and rates. A more predictable development, in turn, would be to the insured’s advantage.
The main components of MTPL
The protection of policyholders against insolvency of insurance companies is one of the primary objectives of insurance regulation. In order
to achieve this goal, a range of regulatory and supervisory measures
are normally established to ensure financial and managerial soundness of insurance companies, and supervisory authorities are expected
to do their best to avoid the failure of supervised companies. It is
sometimes inevitable, however, that some insurance companies will
encounter serious financial difficulties. In spite of all possible supervisory measures, insurance companies can become insolvent. In MTPL,
typically, guarantee funds are created to compensate persons who
suffer bodily injury caused by hit-and-run drivers and to pay claims
for property damage caused by uninsured motorists. Such funds have
been recommended by the Organization for Economic Co-operation
and Development (OECD) and the European Union (EU). The main
arguments in favor of and against insurance guarantee schemes typically revolve around their “moral hazard” and costs. Normally the
guarantee schemes are financed by contributions, which are related to
the premium income of the insurance companies. Roughly half of the
countries with a guarantee scheme have mechanisms in place to permit
the guarantee scheme to borrow or receive income from other sources.
Generally, the government does not finance or underwrite guarantee
schemes, but in practice there is an implicit commitment to finding a
solution that ensures that claims will be met.
In light of the influence of MTPL in developing insurance markets,
it is of utmost importance to gain the trust of the motoring public by
developing a system that is seen to be transparent, efficient, and equitably
run. Such a system would be free of unfair market practices and promote
the timely settlement of claims. Also important are efforts to reduce the
proportion of motorists who are uninsured, because their accidents are
costly for the guarantee fund. No less important is the efficient collection
of data. Reliable data can assist with processing claims, tracking uninsured motorists, pricing products fairly, and preventing fraud.
3
4
Motor Third-Party Liability Insurance
The main elements of MTPL can be summarized as follows:
A. Legal structure: This includes systemic factors such as the role
of the courts and torts; minimum cover; thresholds and limits (if
any); whether the insurance goes with the car or its owner; the
overall role of liability law; the workings of any tariff system; links
to new registrations; and the role of the traffic police.
B. Actuarial methodology: This includes the foundations for establishing premium rates and for posting reserves to meet pending
and future claims.
C. Contingency reserving: including the state guarantee fund
D. Claims management and information service: This includes
data collection, information-sharing mechanisms, and claims
services.
E. Reinsurance: This includes the proper approaches to maximize the
benefits of reinsurance, which should be tailored to the solvency
requirements and financial standing of the particular insurer.
A.) Legal structure: Liberalization, regulation or deregulation
A fundamental principle of any type of insurance is that if the insurers
are to sell coverage willingly, they must receive a premium that is sufficient to fund their expected claims costs and administrative expenses
and earn sufficient profit to compensate for the cost of obtaining the
capital necessary to fund the solvency margin. In fact, an insurer will
only survive if it charges adequate rates consistently over time for the
risks it accepts. This is particularly relevant in general insurance and in
motor business, where risks can be very volatile and the cost of meeting
claims is constantly under pressure from inflation and other upward
trends. Also, the fact that policies are normally issued on a one-year
renewable basis means that an insurer can lose good business or gain
bad business very quickly if its rates become out of line with the rest of
the market and if the tariffs do not reflect the real cost of claims that
the risks will entail. It is, therefore, of vital importance that the insurers
keep premium rates under constant review and be prepared to amend
them as necessary.
In the majority of developing countries, MTPL premiums are
subject to government oversight typically through the setting of
maximum prices. The rationale behind statutory prices is, generally, a
combination of arguments:
MTPL in the European Union (EU) has been deregulated fairly
recently (mainly over the period 1968–94). Yet different countries
Motor Third-Party Liability Insurance
have pursued liberalization at different times and in different ways.
In France, for instance, a very limited regime of control was in place
for the approval of MTPL tariffs after the end of World War II. A pure
regime of liberalized tariffs has been applied since 1986 (that is, many
years before the official date for liberalization imposed by the European
directive). Many of the differences in international motor insurances
are simply a reflection of the length of time the market has been deregulated. Hence, the UK (deregulated in the 60s) has one of the most
sophisticated rating structures, while those more recently deregulated
(e.g. Hungary, Poland and Turkey) still have relatively simple structures.
However, in many respects these are the most interesting markets
as the picture is changing rapidly. Only a few years ago, just the car
and the cover had an influence on the rate, but already we are seeing
additional factors such as “Bonus/Malus” and “Age of driver” becoming
common place. This trend towards a more complicated structure looks
set to continue. The MTPL is more strictly regulated by national legislation than other lines; this is an area where knowledge of the distinctive features is especially important. The primary public policy concern
underlying this regulation relates to concerns over the willingness and
ability of consumers to observe and monitor the financial health of
their insurer, especially when insurance is made compulsory. In the
past, this lead to a variety of policy interventions designed to restrict
competition. Deregulation has involved a lifting of these restrictions
on competition, a refocusing of regulation on prudential controls and
consumer protection issues, and a focusing of regulation on consumer
product lines.
Public policy in the MTPL insurance primarily seeks to overcome
consumers’ difficulties in observing and monitoring the financial health
of their insurer, both before and during the lifetime of the insurance
contract. Even if consumers were willing to do so, there is a concern
that a competitive market does not make the information available in a
form which consumers could understand. Furthermore, where insurance is compulsory, to the extent that the requirement forces consumers
to purchase insurance that they otherwise would not have purchased,
consumers face little incentive to observe and monitor the financial
health of their insurer. As a result, there is a concern that competition
between insurers would lead to deterioration in the financial health of
insurers, bankruptcies and a lack of coverage for consumers.
Regulatory concern relates to concerns over the ability of consumers
to understand and compare the various terms and conditions in insurance contracts. Competition between insurers will therefore be ineffective and will lead to adverse surprises for consumers. These concerns
are not as strong for those lines of (voluntary) insurance which are
5
6
Motor Third-Party Liability Insurance
purchased primarily by large businesses (such as reinsurance and
insurance covering industrial risks).
As a result of these concerns, regulation has traditionally taken the
form of limiting the extent of competition between insurers, through
controls on entry, on prices (particularly price floors), on the methods
for calculating premiums, on terms and conditions and, in some cases,
through the explicit promotion of cartels. These regulations may not be
effective at preserving the financial health of insurers, however, if they
merely divert competition away from, say, prices and into other dimensions of service quality. If the regulations are effective at restricting
competition, they may have the usual undesirable effects of limiting
incentives for efficiency and innovation.
Deregulation has therefore involved: First, the targeting of insurance
regulation to those markets in which the primary consumers are individual citizens and away from markets in which the primary consumers
are large businesses; second, a trend away from controls which limit
competition between insurers (such as statutory monopolies, controls
on premium prices and policy terms and conditions, the fostering of
cartels), to controls on the financial position of insurers; third a trend
away from requirements for prior approval of terms and conditions of
insurance contracts, to reliance on general prohibitions against certain
terms, industry agreements and general consumer protection laws; and
finally, moves to enhance the quantity and quality of information that
insurers must disclose relating to their financial position and attempts
to increase the responsibility of directors and managers regarding to
prudential health of their company. In a few cases MTPL price controls
have acted as a ceiling (rather than a floor) on insurance premiums
(particularly in response to consumer concerns over premium growth
in health and motor vehicle insurance). This results in a withdrawal of
coverage for certain risks, which typically leads to pressure for further
intervention in the form of an insurer-of-last-resort.
B.) Actuarial Methodology
Calculation of Premiums and Reserving
Usual Steps to be taken during a tariff study
1. Collecting Data
2. Creating an analyzable Actuarial Data-Set
Motor Third-Party Liability Insurance
3. Monitoring the results, understanding the characteristics of
claims, then calculating the Key Performance Indicators (Claim
Freq / Average Claim Severity, Loss Ratio)
4. Understanding and describing significant variables specific to
that data set based on the existing information and creating
meaningful risk groups.
5. Calculating the effect of each detected variable to claim costs.
6. Finalizing tariff model
7. Simulating potential results
Three well-known characteristics of insurance have an impact on
the management of MTPL, particularly on its pricing and its reserving:
Inverse sequence. In insurance, the producer (the insurer) prices its
service (insurance coverage) before its cost is known (the actual cost of
the claim, if and when a claim occurs). When the insurer sets its prices,
it faces two uncertainties: one regarding the number of claims that will
occur and one regarding the total cost of all these claims. These uncertainties also affect the supervisory authority when it sets the statutory
price of compulsory insurance such as MTPL.
Long time lag. Although the insurance activity has to be accounted
within a yearly framework, the entire process (period between payment
of the premium and settlement of the claim) usually takes more than a
year. Therefore, at the end of each year, the insurer has to set aside an
amount on the balance sheet to meet liabilities arising out of insurance
contracts underwritten during the accounting year, including claims
provision (whether reported or not) and other technical provisions.
And the longer the settlement process (as in emerging countries), the
more difficult the reserving issue.
Market cyclicality. In almost all free markets, the profitability of
insurance rises and falls in economic cycles. Any understanding of
the management of an MTPL portfolio needs to take into account the
reality that the forces of competition create times when pricing can and
will either rise above or fall below the pure risk rate. The cyclicality of
insurance pricing can affect pressures on MTPL even when that class is
price-controlled.
These three features of insurance (inverse sequence, long time lag,
and market cyclicality) affect both the pricing and the reserving of
insurance, especially in the MTPL branch in developing countries. In
addition, the process of reserving for claims and other liabilities already
incurred as a result of writing the MTPL business does not affect the
ultimate profit or loss stemming from that business; it only controls the
rate at which that profit or loss will emerge in the accounts. Neverthe-
7
8
Motor Third-Party Liability Insurance
less, ultimately, an insurer will only survive if it charges adequate rates
consistently over time for the risks that it accepts.
Actuarial Approach of MTPL Premiums
In most developing countries, compulsory MTPL premiums are
statutory, and the government, either directly or through some more
complex governance process, is in charge of setting statutory minimum
and maximum or only maximum prices.
In most of the more mature markets, prices are free and only subject
to tough competition. In general, insurance risks can be very volatile,
and the cost of meeting claims is constantly under pressure from inflation and other upward trends. Also, the fact that policies are normally
issued on a one-year renewable basis means that, in a competitive environment, an insurer can lose good business or gain bad business very
quickly if its rates become out of line with the rest of the market. In this
case, it is of vital importance for an insurer to keep rates under constant
review and to amend them as necessary.
It is highly desirable that the insurance supervisory and/or regulatory authority, when setting the price of compulsory insurance (if that
is part of its mandate) and supervising market practices, (a) should
have powers to intervene if an insurer’s activities threaten its solvency
margins and (b) should have a regular flow of information that promptly
indicates when intervention may be required. It also should be able
to take action to manage any dumping attempt that may push market
prices below the breakeven level. In both cases, a trivial rule of insurance
is that the premium charged to the insured before tax must represent the
risk introduced to the insurance company (including every component
of the costs) and an acceptable level of profit margin. The actuarial equation to define a fair-cost premium is, therefore, as follows:
Fair-cost premium = base premiums (cost of claims) + acquisition cost
+ administration cost + profit margin – financial income.
A different equation expresses the relation between costing and pricing:
Market premium = fair-cost premium +/– market price adjustment.
Costing the product is included in the base premiums. Pricing the
product (that is, deciding on the actual premiums to be charged in
practice) relates to the loading factors of the equation and the market
forces that may cause the company to adjust the theoretical rates during
the pricing process.
Motor Third-Party Liability Insurance
• The major component of the premium (cost of claims) is
unknown at the time the price is set. Although the exact future
amount is by definition unknown, it is likely that some information can be collected from the past in order to estimate its value.
In practice, there are many ways of calculating MTPL insurance.
The rating process normally starts with a calculation of the pure
risk premium (that is, the premium required simply to meet the
expected cost of claims arising from the policies written under
the new rates); to this should be added loadings for expenses,
profit, and other contingencies.
When setting up the price of an MTPL insurance contract,
premiums are quoted in relation to the unit of exposure. At its simplest,
the risk premium for any group could be calculated by analyzing the
values of the following:
Risk premium (RP) = expected cost of claims / number of contracts.
This approach is always easy to undertake, since both the “expected
cost of claims” and the “number of contracts” are usually available
information.
In essence, a strong statistical basis is essential for the successful
management of any MTPL framework. This is due to the following:
• Insurance is subject to the principles of inverse sequence, long
time lag, and market cyclicality.
• Viable and sustainable MTPL insurance needs to be founded on
intelligent and risk-related pricing foundations. Hence pricing it
requires careful research and analysis.
• The expected cost of claims is a complex function of the underlying risk segments, inflation, and a large number of more
detailed variables.
• Risk segmentation is desirable to promote consumer awareness
of risk, but only a limited degree of segmentation can be achieved
by government-sponsored insurers.
• Data collection is essential to a well-managed scheme.
• Inflation is a deeply complex subject founded in many variables
and needs careful analysis if its impact on MTPL claims is to be
properly understood.
• Commissions and costs need careful analysis.
• External reinsurance, capital issues, and financial revenues all
need to be integrated in the complete actuarial model.
9
10
Motor Third-Party Liability Insurance
• Likewise, all forms of premium reserves and loss reserves need to
be properly established and actuarially monitored.
With all of these in place, there is a sound foundation for a sophisticated actuarial analysis that will enable the pricing of MTPL to be
conducted on a sustainable basis. This, in turn, will enable the MTPL
insurance to fulfill its proper role in helping developing countries to
manage their motor risks and gradually to improve their response to
the challenge presented by motoring.
C.) Contingency Reserving (Guarantee Fund)
At the heart of every property and casualty insurance contract lies a
promise that, if misfortune strikes, insurance will step in to soften the
blow by covering the losses suffered by the insured. MTPL insurance
is intended to cover third-party claims when vehicles driven on public
roads cause significant harm to human life or property. However,
although the legal beneficiaries of the insurance may have the right to
receive compensation, they, or a third-party victim, may not receive
compensation as a result of unforeseen circumstances. Although insurance companies are expected to compensate victims, the state may have
to intervene when the relevant insurer is insolvent or otherwise unable
to pay or when the guilty driver (or vehicle) is uninsured or not identifiable. This intervention is normally done through a contingency fund
(also called a guarantee fund) in the case of an insolvent insurer and
either through a guarantee fund (sometimes the same as the insolvency
fund) or a nominal defendant (which may be an individual or independent government entity) in the case of an uninsured and unidentified
liable party. Guarantee funds and nominal defendants thus constitute a necessary safety net that operates as part of a coherent system of
compulsory national MTPL insurance.
Insurance guarantee funds protect victims of accidents involving
uninsured or hit-and-run drivers. According to the Motor Insurance
Bureau (MIB) of the United Kingdom, which is in charge of compensating the victims of negligent uninsured or untraced motorists, three
people every hour are injured by uninsured or untraced drivers in that
country. The MIB claims-handling experts manage more than 30,000
claims every year for accidents involving uninsured vehicles and seek
to settle the claims fairly and promptly. The company also manages the
motor insurance database, which is the central record of more than 34
million insured vehicles in the United Kingdom. The database is used
Motor Third-Party Liability Insurance
principally by the police but also by the state and insurance companies
as a key tool in combating fraud.
The guarantee fund may also deal with various issues, including
the insolvency of insurance companies and the negative effects of
uninsured driving, untraced drivers, and stolen vehicles. In countries
such as Canada and the United States, guarantee funds may protect
consumers of a wider range of insurance products, including life and
health insurance in addition to MTPL coverage. However, because of
the moral hazard created (that is, drivers and vehicle owners have less
incentive to use better managed insurers), guarantee arrangements are
seen as a poor policy choice in countries that do not also have strong
regulatory and supervisory regimes.
The terms and conditions, scope of coverage, or type of policies included in the scheme will be defined by the regulations of the
country concerned. The details of the financial structure of the fund
will typically be the subject of detailed regulation.
In addition to national regulations, European Union motor insurance directives, specifically the second directive (Directive no. 84/5/
EEC, December 30, 1983) and subsequent amendments, call for each
member state to set up a guarantee fund to provide cover for accidents
caused by uninsured or unidentified vehicles. The fourth directive
refers to a guarantee fund as the body, established in each European
Economic Area member state in accordance with the second directive,
set up to compensate the victims of accidents caused by uninsured or
unidentified vehicles.
Guarantee funds are usually set up as nonprofit organizations under
the control of the insurance supervisory authority or the relevant
industry association. They are legal entities established by law for the
purpose of paying certain policy claims of at-fault parties (in some
countries where no-fault systems apply, the guarantee fund also pays
not-at-fault claims), who either do not have proper insurance coverage
or do not satisfy the legal require ments for coverage, and the claims of
hit-and-run drivers, whose liabilities the insurance companies technically are not obliged to pay. In many ways, guarantee funds resemble
the claims department of an insurance company.
The main legal framework is spelled out in a government regulation
specific to the guarantee fund. The regulation should include details
on the managerial bodies and their job descriptions, clarify the revenue
and expenditures of the fund, describe the terms of use, and detail
the process of evaluating and paying claims. Covered and uncovered claims and exclusions should be defined clearly in the regulation
to avoid any possible disputes between the fund and claimants. An
appendix to this chapter presents a sample, taken from Turkey, of a
11
12
Motor Third-Party Liability Insurance
regulation creating and governing the operation of a guarantee fund for
compulsory insurance.
D.) Claim management and information service
Insurance claim management is a core issue for the protection of insurance policyholders and hence a priority concern for the insurance regulator and supervisors. From the insurance company viewpoint, claim
management is a key element in the competition between insurance
providers and for the improvement of industry’s public image. The claim
should be dealt with quickly and efficiently. The ideal claims management should focus the followings topics as recommended by OECD.
•
•
•
•
•
•
•
•
•
•
Claims reporting
Receipt of claims by company
Claims files and procedures
Fraud detection and prevention
Claims assessment
Claim processing
Timely claims processing
Complaints and dispute settlements
Supervision of claims related services
Market Practices
The environment in motor insurance today is dominated by fierce
competition for market share in some developing countries. The lower
prices not only increased clients’ price sensitivity but have also raised
their expectations of service, and we are now witnessing an unprecedented tendency on the part of clients to switch insurers on the basis
of such criteria. However, one aspect is affecting everyone concerned:
claims expenditure is rising all the time.
Effective claims management is dependent on two fundamental
prerequisites: it must effect a sustained reduction in claims expenditure, which currently constitutes the greatest single cost item in insurance, and at the same time produce greater acceptance and satisfaction
on the part of clients and claimants in order to strengthen customer
ties. After all, a claim and its handling are the ultimate test of an
insurer’s performance and services. In order to meet these two central
requirements, it is essential that the organizational and in perfect
working order. This in turn requires modern information technology
and communications media, highly qualified staff who are easy to reach
at all times, and prompt, client-friendly claims handling.
Motor Third-Party Liability Insurance
Insurance information centers and MTPL insurance database
centers are frequently established to implement an industry wide database of information on motor insurance. They provide a central source
of information for the police and others, assist in the fight against uninsured driving, and provide other benefits as well.
Running a system of compulsory MTPL insurance requires a series
of properly orchestrated participants, including insurance companies,
policyholders, loss adjusters, insurance agents (if relevant), and the
police. A central database that stores and provides access to the insurance information of policyholders, including claims, is critical to this
coordinated effort.
Storing the historical insurance information of the individual policyholders and making it usable for diverse participants in the system
are beneficial for the sake of both the process and supervision. Such a
system is useful for the following:
• Identifying uninsured drivers
• Unifying MTPL insurance practices
• Preventing fraud.
Such a system is a public service that protects the rights of citizens.
If it is seen as such, its presence will support the creation of a well-run,
compulsory insurance sector.
Storing all insurance information in one database and providing
appropriate levels of access to the related parties create benefits across
the community. The key users of the system are the police, who need to
know as quickly as possible who the relevant insurers are and whether
the vehicles are insured. This information puts the police immediately
on the track of criminal activities and can be used constructively in
more general police matters. In the United Kingdom, for example, the
police have powers to confiscate a vehicle that is on a public highway
and found to be without insurance; if, after a period of time, no
evidence of insurance is produced, the vehicle concerned can be sold or
crushed. Individuals will benefit from a system that protects them from
the risk of purchasing a fraudulent policy, allows them to query policies, ensures that they receive a suitable no-claim or other discount, if
eligible, and enables them to receive payments quickly. In some countries, it may be difficult to protect the data from fraudulent use. It is
essential for the system to respect privacy and only grant access to suitably authorized persons. Insurance companies and agencies will benefit
from the system as well. They will increase the volume of premiums
as a result of the correct application of tariffs, gain additional income
from premiums and commissions due to the prevention of fraud, and
13
14
Motor Third-Party Liability Insurance
be protected from the issuance of policies outside the system. Both
insurance companies and agencies (if relevant) will benefit from having
access to the statistics created by the system. Finally, the state will minimize tax losses due to unregistered transactions, be able to protect the
consumer, and receive more tax revenue as insurance companies earn
more income.
E.) Reinsurance
Risk transfer is a mechanism that allows an insurer to protect its
capital and stabilize its results from underwriting risk. From a motor
insurance perspective, this capital is exposed to the risk of an adverse
frequency or severity of claims in any one period. The compulsory
nature of MTPL insurance provides for a minimum statutory limit,
which should, in most countries, be sufficient to indemnify the insured
against loss.
In purchasing reinsurance, insurers seek to improve their financial
performance, security and stability over time. Basically there are five
primary functions of reinsurance from the insurer’s point of view:
• Capacity: Reinsurance provides flexibility for insurers in the
size and types of risk and the volume of business they can safely
underwrite.
• Expertise: Reinsurers supply assistance to insurers in specialised
areas where the insurer may have little or no expertise.
• Stability: Reinsurance programs properly structured will assist
insurers by limiting wide fluctuations in underwriting results.
• Financial: In the financing of insurance operations, being used
as an alternative to increasing an insurer’s capitalization. In this
regard, the insurer may have access to the asset backing of many
large reinsurers.
• Protection: Associated with stability, reinsurance provides protection against the potential large, accumulations that can result
from catastrophic events e.g. earthquakes, bushfires and cyclones.
In practice a company normally finds that its reinsurance requirements are best met by a total program involving different reinsurance
arrangements for particular classes of insurance, which it underwrites
and combining in most cases, several of the treaty forms mentioned
earlier, supplemented perhaps by facultative reinsurance where an
occasional unusually large risk is accepted.
Motor Third-Party Liability Insurance
Theoretically, MTPL insurers should have a statistically significant data set of common policy limits. As a result, they should be able
to ascertain relatively easily the extent to which they need, if any, to
protect against an adverse frequency or severity of loss in respect of
their domestic exposures arising out of MTPL insurance.
The following issues are critical in determining the appropriate reinsurance structure for an insurer’s MTPL portfolio:
• The relationship of premium volumes accepted to the insurer’s
own retained capital and surplus
• The policy limits in force for the MTPL portfolio. The first of
these points, ultimately aimed at the insurer’s solvency ratio, is
almost always addressed with quota share reinsurance.
The issue of policy limits is complex. The insurer will obviously have
to provide coverage for the minimum legal limits required in the insurer’s own country. Less obviously, the insurer almost always will have to
provide cover up to the standard minimum legal requirement in many
nearby countries. Cross-border driving is an escalating issue
for both private cars and commercial vehicles. Commercial haulage
routes can spread the length and breadth of a continent. Customers
increasingly need an insurer to provide cover for every country
in which driving may be needed. In some countries, cross-border
coverage is not a prerequisite, but in many it is. Reinsurance can be
bought for individual risks (facultative) or for a portfolio of risks
(treaty). Given the compulsory nature of MTPL insurance and the
adequacy of the minimum statutory limits, facultative reinsurance is
rarely used unless the original insurer chooses or is required to offer
limits significantly in excess of the original minimum statutory limits.
Given that this scenario rarely arises, this section details the main types
of treaty reinsurance.
The Role of Competition in MTPL Insurance
Across the world, motor third-party liability (MTPL) insurance is
conducted in a variety of frameworks. These range from a monopoly
insurer that sets standard prices to a relatively unconstrained and
competitive free market. Between these extremes lies a range of interventionist and semi-interventionist arrangements. Regardless of the
level of competition, MTPL pricing is heavily influenced by political
economy issues, as this insurance is usually a material expense for the
driver and vehicle owner:
15
16
Motor Third-Party Liability Insurance
i. It suffers from inflationary pressures that are generally greater
than normal inflation, so its cost in all countries tends to rise in
real terms.
ii. For commercial vehicles, the high and rising cost of insurance
is a key factor in the profitability (or otherwise) of the owner’s
business.
iii. In most developing countries, there is relatively little awareness
of the causal link between bad driving standards and higher
MTPL premiums.
iv. There is also an emotional issue here is also an emotional issue:
v. Many drivers are reluctant to accept that their driving might
be less than perfect, so a high TPL premium may meet with
objections.
A.) The Centrally Priced Option
Many countries have found MTPL an unpopular class with insurers.
If the central pressures to hold pricing down gain the upper hand,
the inevitable consequence is that there will be losses for insurers. It
is always hard for regulators to raise commercial vehicle insurance
pricing to economically viable levels, this was the case in India, Brazil
and Turkey. This experience is common. Wherever MTPL pricing is
fixed centrally, the pressures to keep pricing below economically viable
levels tend to gain the upper hand. This usually leads to an economically undesirable outcome.
• In a plural-insurer context, insurers with efficient systems and
good management will avoid participating in a class where
central pricing controls restrict the scope for profit. The tendency,
therefore, is for insurers with weaker management to participate,
and this in turn leads to solvency problems, pyramidal cash
flow arrangements, and eventually some form of centrally
financed bailout.
• In a monopoly-insurer context, the tendency is to drive prices
down to a level where the insurer is starved of funds. Only
when the insurance fund is reduced to impractical levels does
some kind of adjustment become necessary, but by then the gap
between current pricing and required pricing is so large that
adjustment for the consumer is often painful.
South Africa has found a successful solution: a centrally fixed
insurance price that is not subject to massive political pressures. In
Motor Third-Party Liability Insurance
South Africa, the principal MTPL insurance fund levy is collected
at the petrol pump. A portion of the tax levy that is collected by the
government from all road users is channeled to the government’s
road accident injury compensation fund. This approach gives rise to a
surprisingly attractive outcome:
• The more petrol you buy, the more you pay toward the nation’s
MTPL insurance costs; this has a common-sense user-pays fairness
• The more petrol inefficient your vehicle is, the more you
contribute to the insurance fund; thus the levy has an element of
being a “green tax.”
• The cost of the insurance is a very small portion of the cost of
petrol at the pump; for this reason, changes in the insurance levy
become a much diminished political issue.
• The cost of collecting the levy is very low indeed, one of the
cheapest premium collection arrangements in the world.
• The uninsured driver does not exist; every driver needs petrol
and therefore pays a premium.
• The foreign vehicles visiting South Africa find that they too con•
tribute to the levy.
B.) The Free-Market-Priced Option
The free-market-priced option has many good qualities, but it is not a
panacea. It is best to contrast some leading advantages with some key
disadvantages.
Where the Free Market Succeeds
The free market has a number of undeniable theoretical advantages:
• Homogeneous risk underwriting. MTPL is a class where very
large numbers of risks are broadly homogeneous in character.
Given current actuarial technology and adequate databases,
the free market should be efficient at pricing risk and marketing
accordingly.
• Administrative efficiencies. The existence of a large-volume pool of
risk with substantial segments of high-quality risk provides incentive to insurers to develop all types of administrative efficiencies.
The development first of the use of the telephone as a sales tool
17
18
Motor Third-Party Liability Insurance
and then of the Internet has created a quantum leap in efficiencies
for society in keeping down the cost of MTPL insurance.
• Claims efficiencies The profit motive has given free-market
insurers very strong incentives to improve claims management.
Many state-sponsored systems have suffered from weak claims
management. The South African system is a good example,
where in the 1970s and 1980s the private insurers (which had
been tasked with administering the claims for the central system)
gradually found that the most profitable way of handling a claim
was to pay it quickly regardless of the cost. This gave rise to
explosive claims inflation that, in practice, wrecked the system.
In response, the authorities were forced to redesign the whole
system of compensation.
• Regulatory efficiencies The stronger the leading insurers in a free
MTPL market become, the more their behavior fits a standardized pattern. In general terms, they become easier to regulate.
The biggest auto insurers in many markets are often the bestrun insurers. There are exceptions (mainly in less well-developed countries), but the trend in most countries over time leads
toward motor insurance becoming a less important class for
regulators.
• Consumer responsibility This last point is often omitted from
discussions, but in fact it is of very deep importance, particularly for developing countries. Where there is a state provider, the
common consumer response is to imagine that responsibility has
been assumed by the state and that no further effort is required
on their part. This type of attitude causes many deep problems
and much waste. Where the free market imports open (or semiopen) pricing features to MTPL, the impact on consumers’ sense
of responsibility is of vital importance in upgrading consumer
behavior. From the day that the consumer appreciates that his or
her own motor premium is a function of his or her own driving
behavior, a dynamic link is established between the cost of motor
premiums and improved road behavior.
If the regulator permits the full force of free-market pricing to
determine insurance costs, the smarter insurers will focus on the
better-quality risks. This generates effective competition, and market
forces will ensure cheaper premiums for the better risks. Conversely,
there is usually a scarcity of capacity for the high-risk types of vehicles.
This leads to heavy price escalation for the “severity risks” and can be
accompanied by unpleasant political economy externalities, including
forced cross-subsidies. Undesirable market practices can also emerge.
Motor Third-Party Liability Insurance
For example, if taxi drivers find it almost impossible to find an insurer,
they often end up using an agent. The agent with control of a rare
capacity supply is in a position to levy excessive commissions; market
inefficiencies ensue. Taxi cooperatives also sometimes form small
mutual insurers that are not always run by people with sufficient insurance experience.
Where Competition Fails to Encourage Improvements Directly
Competition is not the solution to every problem. In some areas, the
introduction of competition does not lead naturally to market-driven
benefits. The most obvious of these are situations in which the collective community stands to benefit from an investment in which the
effects go beyond an individual insurer.
• Road design safety is a prime example. In some countries, the
police collect statistics regarding accidents that keep occurring at
particular road junctions. It is not realistic to expect one insurer
in a competitive market to invest in paying for improvements at
that junction; the insurer might save on its claims costs, but it will
not want to spend that money because of the fear that such action
will benefit a competitor.
• Child education is a second key example. Teaching road safety,
the use of seatbelts, and the dangers of drunk driving at schools
undeniably brings community benefits. But again it is almost
impossible to convince a competitive insurer to finance work
like this; the insurer will keenly support initiatives that give
competitive advantage just to its own position, but the nature of
competition discourages it from supporting this type of general
community investment.
• Administration of justice reform is a third example. In many
countries, this is a major problem. It runs through both developed and developing countries. Again, insurers individually
are not likely to spend time or money pursuing reform, however
badly it is needed.188 motor third-party liability insurance
in developing countries
Insurers will always look hard at options that improve their own
position. For example, where one insurer finds a more efficient way
to rehabilitate an injured claimant, it will encourage that process as a
means of gaining a competitive advantage.
19
20
Motor Third-Party Liability Insurance
The more general community situations are best encouraged
through a central body. Road design safety is best promoted through
the country’s highway authority, child education obviously should go
through the usual education authorities, and law reform should be
addressed at the highest political levels.
Nevertheless, the insurers should contribute their intelligent opinions to these processes. Often it will cost a good insurer almost nothing
to give its opinion and encouragement to the relevant authority. There
is ample evidence of the benefits of incorporating road safety issues
into the general education curriculum. Some police forces will visit
schools to contribute to this effort. There is also massive evidence to
show the value of investments in improving road design safety, both
on existing roads and when building new roads. Insurers often understand these issues very clearly. Without doubt, there is scope for them
to make a real contribution to the community, without spending their
own money, by helping with cost-benefit analyses regarding death and
injury risks and by lobbying for improvements that the central highway
authority will want to implement. They can do this individually or
through market associations.
There is no simple solution to any of these matters. Every country
is unique, and each needs to find its own optimal answer. Nothing can
be centrally prescribed. However, the examples given in this chapter
suggest that, as time passes, competition of one kind or another has
brought about reforms for the wider benefit of the community. Some
state-run systems have operated with striking levels of success, but, on
the whole, they are in the minority.
Motor Third-Party Liability Insurance
Annex I—Written Premiums in
Select Countries
21
22
Motor Third-Party Liability Insurance
Market Ranking 2009 by Written Premiums
Legend: [Y] Prior Year[P] Preliminary [F] Forecast [A] Audited
Currency: USD millions unless otherwise noted
Market Sector: Motor and Total Non-life
Motor
Premiums
Total Non-Life
Premiums
Ratio of motor to
non-life premiums
134.38
11
Status
Country
[A]
Afghanistan
[A]
Albania
50.28
70.74
71
[A]
Algeria
482.95
976.72
49
2008 [Y]
Bahrain
145.41
302.83
48
[A]
Bulgaria
741.37
2008 [Y]
China
24527.34
42097.28
58
[A]
Croatia
743.16
1148.11
65
[A]
Egypt, Arab Rep. of
282.54
781.73
36
2008 [Y]
Iran, Islamic Rep. of
2478.36
3384.46
73
2008 [Y]
Iraq
9.81
19.61
50
[P]
Israel
2074.76
3278.21
63
[A]
Jordan
211.31
349.51
60
[A]
Kazakhstan
140.91
619.44
23
[A]
Kenya
179.04
416.4
43
2008 [Y]
Kuwait
199.03
501.12
40
2008 [Y]
Lebanon
164.5
719.94
23
[A]
Libya
67.78
261.33
26
[A]
Montenegro
52.42
66.82
78
[P]
Morocco
817.63
1432.48
57
[A]
Oman
262.75
513.54
51
2008 [Y]
Qatar
137.43
668.54
21
[P]
Romania
1835.32
2289.91
80
[A]
Russia
7430.01
14127.8
53
[A]
Saudi Arabia
814.67
1684
48
[A]
Serbia
382.02
598.41
64
2007 [Y]
Sudan
136.15
225.89
60
2008 [Y]
Syria
169.2
250.71
67
[P]
Tunisia
349.25
546.17
64
[P]
Turkey
3099.38
5412.02
57
2008 [Y]
Yemen, Rep. of
21.87
65.37
33
14.93
1010.8
73
Motor Third-Party Liability Insurance
Earlier published primers are available on our website
[http://www.worldbank.org/nbfi] and currently include:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Introduction to the Insurance Industry
by Rodney Lester
Introduction to Reinsurance
by Rodolfo Wehrhahn
Microinsurance Business Models
by Taara Chandani
Role of the Actuary in Insurance
by Michael Hafeman
Asset Structures for Insurers
by Michael Hafeman (based on a document written by Ray Willing)
Insurance Accrual Accounting
by Oliver Reichert
Consumer Protection Insurance
by Rodney Lester
The Role of the Underwriter in Insurance
by Lionel Macedo
The Role of the Insurance Industry Association
by Brad Smith and Diana Keegan
Intermediaries
by Rodney Lester
Insurance Governance and Risk Management
by Rodney Lester and Oliver Reichert
Agricultural Insurance
by Ramiro Iturrioz
On and Offsite Inspections
by Michael Hafeman and Tony Randle
Risk Based Supervision
by Tony Randle
Trade Insurance
by Peter M. Jones
23