Thursday, May 19, 2011

It’s the motor tariff that determines premium

I WOULD like to comment on “Insurance directive will help motorists” (The Star, May 17).
First I’d like to congratulate Bank Negara Malaysia for the decision which put motor vehicle owners at ease over the availability of third party motor insurance cover.
The writer mentioned that insurers use terms like “loading”, “excess”, etc. so that they can charge motorists higher premium rates. I disagree with this as well as his idea of “a classic case of the poor subsidising the rich”.
First of all, we have to understand that insurance premium should be charged based on the risk characteristic of the insured. But, that is not the case in Malaysia, where the premium is governed by the motor tariff.
Germany has adopted driver-related risk characteristics. Research by Schwarze and Wein (2005) found that car age, driver age, mileage, occupation and garage ownership are the most common risk variables.
Other risk variables are children, long-term clients, rebate for safe driving practice and fuel-saving cars.
In Canada, the Demerit Point System is widely used to calculate premium rebates or surcharges.
Generally, most insurance companies would not insure vehicles that are more than 15 years old as this category of vehicles bear higher risk.
Therefore, it is fair that a “loading” or “excess” be allowed to compensate for the “extra risk” the insurers have to assume.
Consumers should know that they will still get insured under the Malaysia Motor Insurance Pool (MMIP), which is the insurer of last resort.
Where previously MMIP cover could be obtained from UniAsia General Insurance and Multi-Purpose Insurance, consumers now can obtain the cover from all general insurance companies.
So, there will be no more issue of “rejected cases”.
Insurance is about risk pooling, it is the concept of spreading of losses incurred by a few over an entire group or over a pool of people, so that average losses are substituted for actual losses.
Let us look at statistics from Bank Negara.
“As at end-2009, there were approximately 10.8 million motor insurance and takaful policies issued by insurers and takaful operators.
“Comprehensive policies made up 67.2% (7.24 million) of total policies issued while Third Party policies made up 32.8% (3.54 million). The majority of Comprehensive policy owners were owners of private cars.
“For Third Party policies, the majority were motorcyclists. More and more insurers are becoming selective in offering Third Party insurance cover as premiums for Third Party are insufficient to cover the claims payout.
“For Third Party Bodily Injury and Death (TPBID) alone, for every ringgit of premium earned, about RM2.67 were paid out as claims. This resulted in the industry facing an estimated loss of RM1bil a year arising from TPBID.”
Total premium collected for comprehensive policies was RM5bil and Third Party RM382.4mil.
Based on the statistics above, there is no issue of “the poor subsidising the rich” or vice versa. For very RM1 insurers earn, they are paying out RM2.67.
In order to get reasonable premium, all the risk pooling participants should have the right attitude and exercise ethical driving while on the road.
With the correct behaviour, we can together contribute to fewer accidents and injury. Hence, there will be fewer claims. When there are fewer claims, the chances are that we get further rebates on the premium charged to us.
As the saying goes “what go around comes around”.
Most importantly, we have to do away with the third world mentality of thinking that insurers are charitable organisations.
Start exercising good driving habits and think of others’ safety. Who knows, you may get premium rebates for good behaviour, or pay surcharges if you are bad!

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