Reinsurance Tutorials #9 - Season 2
Hi everybody 👋
Well, we’ve talked a lot about Motor Insurance, especially within the French Market.
But is Motor Insurance the same around the world? The answer is obviously: No!
So, let’s take a ride together and examine the specificities of Motor insurance around the world!
Let’s start! ⏬
First thing we all have in mind when we hear the term Motor Insurance, is the compulsory part of it. But is it the case everywhere?
You would never ever even think of getting behind the wheel of a car without having protection in case of an accident.
Well, even though motor insurance is mandatory in almost all countries around the world, there are a few places where it is not compulsory or not entirely compulsory (for example only Motor Bodily Injury is compulsory in Israel) and motor insurance is purchased by the driver only on a voluntary basis.
That is the case of our first stop: South Africa!
Despite having a broad range of insurance offers, a study conducted in 2020 by the Automobile Association of South Africa established that 65% to 70% of the 8 million vehicles in that country are currently not insured!
Most South Africans do not buy an insurance policy based on the cost of the premium, but unfortunately, in case of an accident involving bodily injury, the cost of compensation is paid to the victims. This usually leaves the faulty driver ruined, as they do not have the resources to pay for this compensation. To provide a minimum of indemnity to the victims, the South African government implemented a Road Accident Fund, providing a portion of compensation to the parties that is reduced depending on the percentage of responsibility they bear in the accident.
In Europe and almost all countries in the world, Motor insurance is mandatory by law. But it doesn’t mean that all covers are the same.
However, the EU Motor Directive provides a standard and minimum scheme that must be complied with by all EU Member States.
Moreover, all countries within the Green Card System make it mandatory for drivers to have Motor Third Party Liability Insurance.
Second stop: Europe!
As already discuss and seen in the previous videos, motor insurance in France is mandatory and provides unlimited coverage to a third party in case of a loss. Optional first party driver insurance may be purchases. It usually provides up to 1 million euros in coverage to the driver, regardless of his or her liability.
What about the others EU Member States?
Well, in 2009 the EU promulgated a European Directive making it mandatory for all motor vehicles in the EU to be covered by third-party liability with a minimal amount for bodily injury of 1,220,000 euros per victim or 6,070,000 euros per claim, whatever the number of victims. That is the required minimum amount of coverage.
So, depending on the European country and its legislation, motor liability cover may be slightly different. In Poland for example, most of insurers provide the amount stated in the European Directive, where in Western Europe countries, providing unlimited cover for third party is a standard. To cover this gap when travelling across Europe, we implemented what we called the “Green Card”, making motor insurance valid in almost all European territories, and offering protection regardless of the original domestic limits.
Example: If a Polish insured driver has an accident with his or her own car in France or Germany and if he or she is at-fault, the insurance company will provide liability coverage on unlimited basis (even if the cover on the driver’s domestic market would be limited). Quite practical if you plan a road trip across Europe!
We have discussed insurance coverage obligation or covered amounts, but do all countries deal with motor liability on the same indemnity basis?
Again, the answer is: no!
There are two bases of indemnity: third party liability and no-fault.
Third party liability is quite simple to understand. If you are at fault in the event of a loss; then you and your insurer will have to pay the consequences and compensate the victims. But what’s the no-fault basis?
Next stop: New Zealand!
In New Zealand, there is no Motor Third-Party Liability covering bodily injury because everyone is already protected by the Accident Compensation Corporation, on a “non-fault cover” basis.
This means that in case of an accident, no liability is established and all persons injured are covered and received compensation through the ACC. This fund is financed by taxes and annual vehicle license fees, so everyone participates in this fund.
However, the fund only pays compensation for bodily injuries. So, to protect themselves in the event of motor property damage, New Zealanders must still purchase additional Motor property coverage.
Most countries choose to use the third-party liability insurance basis. No-fault basis is mainly used in New Zealand, Australia, and in some Canadian provinces and US states.
One last point we haven’t mentioned during our road trip across Motor Insurance, is that the payment of the compensation can be settled in two different ways: through a lump sum payment or an annuity. Some markets use both, depending on court decisions or the decisions of the victims.
A lump-sum settlement is a one-time payment providing compensation for an injury. It means that the victim will not receive any future payments, so in case of serious bodily injury, the victims have to carefully scrutinize the amount received by the insurer in order to be able to meet any additional future expenses they could incur.
Last stop: Asia!
In Japan for example, it is pretty common to settle losses on a lump-sum basis, with a fixed payment based on a pre-determinate table of compensation used by the market. This will depend on the victim’s conditions, but also on other specifics variables such as his or her family situation (for example, the number of dependents), the job position, the degrees of disability and more. So, compensation is paid quickly and the losses are settled very fast.
On the other hand, an annuity is a series of payments made at equal intervals over time, that would is aligned with the needs of the victim until his or her state of health has been consolidated. In case of severe bodily injuries, annuities can be paid for over 20 or 30 years.
Thus, the insurer and reinsurer will carry the loss for a very long period of time and have to meet all the challenges involved. This means the insurer needs to estimate the total final cost of the loss considering the cost of future care, inflation, financial return and many more criteria and book the appropriate amounts of reserves. This makes annuities much more of a challenge than a lump sum settlement.
Well, we’ve reached our final destination! As you can see Motor Insurance can be very different from one market to another, and as a reinsurer, we need to understand these market specificities in order to offer the most appropriate protection and solutions to our partners.
This video is closing our topic dedicated to Motor line of Business. On the next video Patrick will open a new chapter dedicated to the challenges our world and industry is facing : Catastrophes events.
Hope you’ve enjoyed this video and I’ll see you soon for another one!
Bye for now 👋
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