Monday, February 3, 2014

Motor Insurance 101 - Why premium going up soon?

According to PIAM website, current motor insurance tariff has not changed since 1978, wow, that is about 36 years already...

Therefore, beside Petrol, Sugar, Electric Tariff, Food, motor insurance tariff will be increased soon by way of de-tariffication, because currently it is a loss making business for most insurers.

Key factors affecting the deteriorating results of the motor insurance sector are:-
  1. Inflation of spare parts prices, repair costs, legal fees, adjustors' fees, cost of claims administration, etc.
  2. Escalating court awards e.g. the highest court award was for RM9.8million.
  3. Vehicle thefts - the total number of stolen vehicles has increased significantly from 8,869 cases in 1997 to 40,284 cases in 2009 i.e. up 4.5 times over 13 years whilst the quantum of claims escalated from RM135million to RM606million in 2009, up 4.5 times in the same 13-year period.
  4. Fraudulent claims. These are fabricated or inflated claims perpetrated by syndicates or various parties to insurance claims or even ordinary law-abiding citizens who take opportunity to defraud insurers. Based on a study, bogus and inflated insurance claims cost the UK insurance industry over £1.6 billion a year and this would have added 5% to every policyholder's premium. When translated to the local scenario, the same 5% for insurance fraud will cost an additional RM650 million in premium payments by policyholders in Malaysia.
  5. Risk Based Capital Framework requires that each insurer maintain a capital adequacy level that commensurate with their risk profiles and was implemented from Jan 2009. Insurers are generally required to provide for additional capital or risk charges for their business risks. Inadequacies in premium ratings must be supported by higher capital requirements and this is the scenario that many motor underwriters are experiencing in the light of the deteriorating motor insurance results.