Compulsory 3rd Party Insurance (Final Submission v2)
-
Upload
lwando-sangcozi -
Category
Documents
-
view
619 -
download
0
Transcript of Compulsory 3rd Party Insurance (Final Submission v2)
2015
Formula 1 Team
Captains of Industry Programme 2015
11/12/2015
TOPIC #7: COMPULSORY THIRD PARTY INSURANCE
Integrity Intensity Intelligence Innovation
F1 TEAM 1
EXAMINE THE ROLE OF A POTENTIAL THIRD PARTY COMPULSORY INSURANCE
SCHEME FOR MOTOR VEHICLES, AND HOW THIS COULD BE IMPLEMENTED IN ORDER
TO IMPROVE MARKET PENETRATION FOR MOTOR INSURANCE.
Declaration of Authenticity
We Formula 1 hereby declare that the content of this document is our/ my own work and that all
sources used have been referenced.
Signed (Syndicate Members):
Lwando Sangcozi
Lulu Mkhize
Michael Khumalo
Thabani Msibi
Kathleho Matoba
Khanyisani Makhanya
F1 TEAM 2
TABLE OF CONTENTS
Declaration of Authenticity ......................................................................................................... 1
Glossary of Terms ...................................................................................................................... 3
1. EXECUTIVE SUMMARY .................................................................................................... 4
2. SITUATION ......................................................................................................................... 5
3. CONCERN .......................................................................................................................... 6
4. QUESTION ......................................................................................................................... 8
5. ANSWER ............................................................................................................................ 8
6. REASONING ...................................................................................................................... 9
7. EVALUATION ....................................................................................................................16
8. CONCLUSION ...................................................................................................................18
Table of References ..................................................................................................................19
Appendices ..............................................................................................................................20
F1 TEAM 3
Glossary Of Terms
Third Party Insurance:
In many countries compulsory third party insurance generally provides protection against two
scenarios, which are:
1. The costs from injuries caused to another person as a result of a car accident (RAF)
2. The costs of repairing or replacing another person's property damaged by you as a result of
a car accident. This is usually the damage caused to another person's car, but could also
include personal items inside the car and other property like fences and cycles, or public
property such as power poles and street signs.
SADC: Southern African Development Community
SADC Protocol: A Protocol is a legally binding document committing Member States to the
objectives and specific procedures stated within it. In order for a Protocol to enter in to force,
two thirds of the Member States need to ratify or sign the agreement, giving formal consent and
making the document officially valid. Any Member State that had not initially become party to a
Protocol can accede to it at a later stage. (SADC, 2015).
SMME: Small, Medium & Micro Enterprises
Financial Inclusion: Financial inclusion is the proportion of South Africans using financial
products and services, formally or informally. (Finscope, 2011)
ZAR: South African Rand
VAT: Value Added Tax
FSB: Financial Services Board
Comprehensive Motor Insurance: Financial Services Board
SAIA: South African Insurance Association. It represents the industry at all levels and with all stakeholders to ensure a sustainable and dynamic industry for the benefit of all South Africans. Its members abide by the SAIA Code of Conduct, which ensures adherence to best-practice industry standards and self-regulation.
F1 TEAM 4
1. EXECUTIVE SUMMARY
This report was commissioned to examine the role of a potential third party compulsory insurance
scheme for motor vehicles in South Africa, and how this could be implemented in order to improve
market penetration for motor insurance. The research was focused on the how to design a
compulsory scheme that can be successfully lobbied with government and various stakeholders,
is able to sustainably fund itself, and that is in the best interest of all motorists. This has to be
done by getting a proper understanding of all the stakeholder needs, risks and concerns, and
designing a scheme that can meet the majority of these.
During the research it was established that the need for compulsory insurance is already being
discussed and the insurance industry, National Treasury, motor industry, and SAIA are already in
full support of principle. It was also determined that most motorists understand what 3rd party
cover is, and see the need for it. However, there are some stakeholders such as the Department
of Transport, who might not be in favour, for political reasons. It was determined that the solution
designed must meet the criteria of affordability, adequate cover for motorists, profitability for
insurers, adequate consumer protection for motorists, efficient procedures to collect premiums
and recognition of insurance issued in other countries.
The business cases conducted indicated that the best solution is the roll out of a 3rd party scheme,
compulsory for each vehicle owed, at a cost of R45 per month per vehicle, with cover limited to
R50 000 per incident. This scheme is to be run by individual insurance companies, with
competition open to all registered financial service providers registered under the Short Term
Insurance Act, enforced by the Department of Transport, and regulated by the FSB. Proof of
insurance from countries will be accepted for foreign drivers visiting South Africa.
This option is considered to be affordable for motorists and the cover of R50 000 is also adequate
to meet most accident costs. The business case has proved to be profitable for insurers and
government. It is expected that the administration will be run efficiently and in a flexible manner
as result of the competition that will be opened to all insurers to compete for the same customer.
The regulation by the FSB will ensure adequate protection for consumers. This model is line with
the international benchmarks in countries that have already successfully implemented
compulsory insurance.
F1 TEAM 5
2. SITUATION
2.1 Low uptake of 3rd party insurance & under-insurance of motorists
Two thirds of South African motorists are currently not insured for 3rd party damage. This poses
numerous challenges for the motorists, the government, the community and the insurance
industry. Of a total of 10,4 million vehicles on South African roads, 3,4 million are insured. The
rest are either un-insured, un-roadworthy or unlicensed. That means that 10% of all South African
cars are likely to crash, and only a 3rd of those can afford the attached costs of repairs. This
equates to 40% of all motor insurance premiums generated in South Africa (Smith, 2014).
2.2 High number of motor accidents
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
development problem, killing almost 1.2 million people globally each year and injuring or disabling
between 20 million and 50 million more (WHO, 2011). Serap says that both WHO and World Bank
data show that, without appropriate action, these injuries will rise dramatically by 2020, particularly
in rapidly motorizing countries. South Africa, as a low- and medium-income country, faces similar
challenges especially with an estimated of only a third of motor vehicles insured. South Africa
has one of the worst rates of road accidents in the world. In fact, there are 27.6 road fatalities per
100 inhabitants in South Africa. Developed countries in North America and Australia are 10.4 and
5.6 respectively (Wikipedia, 2015). The majority of causes for accidents are behaviour related.
2.3 High cost of comprehensive motor insurance
The cost of vehicle insurance is providing to be very difficult for most South Africans to afford. As
part of this research, a questionnaire was submitted to a number of motorists to understand if
their cars are insured, and the reasons why, if not insured. 83% of respondents stated that
affordability of insurance was their main reason for not taking up insurance on their vehicles. Even
those who are already covered stated that affordability is still an issue. (Refer to Appendix A).
2.4 SADC Mandate
The SADC Protocol signed by the SADC member states, seeks to address third party insurance
in a harmonized manner. Some of the SADC members already have compulsory third party motor
property insurance in place. Compulsory third party motor property insurance has already been
F1 TEAM 6
successfully implemented in many other countries in the region, such as Malawi, Mozambique,
Namibia, Zimbabwe. (SAIA, 2010).
3. CONCERN
3.1 Affordability of insurance
There is a concern that as a result of the under-insurance of the majority of tourists, the average
South African motorists cannot afford comprehensive insurance in its current form. This situation
is highly unsustainable.
3.2 Financial liability for un-insured motorists
Un-insured motorists face a risk of having big payouts in the event of an accident, particularly
when damage is cause to a 3rd party. This places an extra burden on the already cash strapped
motorists who have to deal with high petrol prices, high maintenance costs such as tyres, and
higher e-tolls for Gauteng motorists. The cost of repairs has increased significantly over the past
few years, and is highly influenced by fluctuations in the Rand exchange rate. The Road Traffic
Management Corporation estimates that there are 960 000 crashed in South Africa per annum.
The average cost of repairs for these is R32 000 each (Road Traffic management Corporation,
2011). An excess of R15 billion is spend in South Africa on vehicle repairs. 80% of the claims
occur as a result of accidents, and 20% as a result of theft. This is a significant shift from a few
decades ago, when the numbers were the other way around. 85% of accident are due to Human
error – disregard of rules, unsafe overtaking, speeding, drunk driving, fatigue, distraction etc.
10% are caused by vehicle errors, such as tyre burst, steering problems, loss of control, poor
vehicle Maintenance 5% Environmental - Wind, potholes, tree branches and rocks.
3.3 There is no liability for foreign motorists
When drivers from neighboring countries such as Lesotho and Swaziland are involved in
accidents whilst in South Africa, they can easily go back to their respective countries without
having met any 3rd party obligations where an accident involves other parties. That is because
there are no legal mechanisms to ensure that foreign visitors have compulsory insurance before
entering the countries. This however, is not the case for South Africans who drive into countries
such Mozambique and Zimbabwe, which already have compulsory insurance.
F1 TEAM 7
3.4 Profitability for insurers
The profitability of providing comprehensive insurance is proving more and more difficult for the
majority of short term insurance companies. There is evidence of insurers moving out of
unprofitable businesses. (PWC, 2015). The loss ratio for the personal lines business is
unsustainably high for most insurers. More and more insurers might move away from
comprehensive motor insurance and more to the more lucrative products such as assistance and
credit life. This puts a significant strain on insurance industry profits. There is also an increased
risk of car damages as a result of hail. In a survey conducted by KPMG on short term insurance,
insurers with significant motor books highlighted their disappointment with the average repair cost
for the motor hail claims being substantially higher than the historical averages for these types of
claims. It appears that the volume of the hail claims put substantial strain on the repair shops in
Gauteng which culminated in the insurers not being able to manage the cost of the claims as
under normal circumstances. Many insurers have as a result reassessed their claims settlement
procedures that will apply if such an event occurs again. (KPMG, 2013).
3.5 Disproportionate share of the burden
There is a concern that the share of the risks for accidents on South African roads is
disproportionately borne by the 1/3rd that is currently insured. Victims of accidents should ideally
be compensated for the damage caused to their vehicles by others. Conversely, those who cause
damage should have a responsibility and obligation to make amends for the damage. (SAIA,
2010).
3.6 SADC Mandate might not be complied with
South Africa is by most measures, a leader and trendsetter in the SADC context. There is
therefore an expectation for South Africa to take the lead with regard to the implementation and
roll-out of compulsory insurance.
4. QUESTION
Given the above situation and the concerns thereof, the question is: “What factors should be
considered to get buy-in, in order to implement compulsory 3rd party insurance in a sustainable
F1 TEAM 8
manner. The following was the outcome, using the Systems thinking Interrelationship diagram
(Refer to Appendix B):
Chart 1: Systemic Stairway ™
5. ANSWER
According to chart 1 above, the most important factors to consider are the stakeholders that are
affected by the under-insurance situation, as well as the legislation and enforcement.
6. REASONING
Upon Interviews with Mzayiya Sondiyazi of SAIA and Barry Scott, an expert on the topic, it was
established that the following stakeholders are the most key to focus the research on:
F1 TEAM 9
The experts were all of the view that unless a proper analysis of the needs and interests of the
stakeholders that affected is conducted, the exercise will be futile.
6.1 Motorists
With the on-going increase of cars in the roads of South Africa, the question is how big this is an
impact to other motorists’ safety. Despite the stringent road safety enforcement strategies, road
accidents continue to rise and result to fatalities and damage to property. Contributing factors
identified as the cause of motor vehicle accidents are human, vehicle and road factors. The
introduction of a compulsory form of insurance for all motorists would mean that everyone has at
least some form of basic protection through insurance cover and will ensure a more equitable
distribution of the financial burden of motor accidents. Compulsory third party motor property
insurance would make insurance more affordable for all those who do currently insure their
vehicles as the costs to insurance companies will be reduced. However the pertinent issues
around third party insurance which have a direct link with affordability is the issue of funding model
and who will run the system. The needs and risks of motorists can be summarized as follows:
(a) Perceived value of 3rd party or comprehensive insurance
A survey conducted on motorists by the syndicate indicated that about 80% of motorists see the
value in comprehensive insurance and identified that there is a need for all motorists (Refer to
Appendix A). Motorists always need to be prepared to safe guard own financial situation. If
coverage is low then there is a risk of a shortfall in cover in relation to damage to third party's
property. However, high coverage limitations can cost great deal more in monthly premiums. It
appears therefore that there is no great need to convince motorists of the need for the 3rd party
cover.
(b) Risks borne by motorists
Fault for causing an accident is either created by law or defined by common law. Common law
recognizes four basic levels of fault namely; negligence generally means careless or inadvertent
conduct that results in damage, which is quite common in automobile accidents. One can be
negligent by failing to do something, such as not yielding the right-of-way to avoid an accident, as
well as by actively doing something (such as running a red light). Strict liability (regardless of fault)
may be imposed, even in the absence of fault, for accidents involving certain defective products
or extra hazardous activities (such as the transporting of explosive chemicals). Thus, fault in an
accident may be established merely by citing a statute that has been violated. A motorist
presumed to have caused an accident by virtue of a statutory violation bears the burden of proving
F1 TEAM 10
that this act of negligence was not a proximate cause of the injuries. Insurance coverage is some
of the best tools available when it comes to risk management. The most important factor to
mitigate this risk is by ensuring the designed solution has adequate cover.
(c) Affordability of premiums
The rising cost of motor insurance in South Africa is fast becoming unsustainable for many
consumers. This, combined with the high volume of uninsured vehicles on the roads, has made
it increasingly crucial that new measures such as compulsory third party be considered. Currently
many insurance companies struggle to recoup costs from third parties who have no form of
insurance. If the insurance companies are unable to recover this money then they must fund these
repairs themselves; and the only way to do this is to increase premiums for the wider pool of
policyholders. As a result, those who do have insurance cover are being forced to cover the costs
for those who do not.
The current third party motor liability premium is about R50 per month (this represents 8% of an
average comprehensive motor premium. Based on the kind of vehicle this could increase the
premium to R100 per month. The designed solution has to be affordable enough to be below the
current average of R50.
(d) Quality Service -
With motor vehicle accidents often more than one party may have contributed to the accident so
the accident may not be solely one driver’s fault, for example, another car runs into your car.
There needs to be an increase in the number of certified and qualified panel beaters to ensure
that the motorists get access to good quality service.
6.2 Government
Upon interviews of industry experts, it was established that the two departments are not
necessarily aligned in their approach to 3rd party insurance. Upon its engagements with the
department of transport, SAIA was given an ultimatum to support e-tolls in return for the
department’s support of compulsory insurance. This means it will be very difficult to obtain political
support required for this stakeholder, and the main selling point for them will be to demonstrate
how the proposed solution will reduce road accidents. The approach to National Treasury will be
somewhat different, as they have already demonstrated some support for the idea. They already
requested SAIA to conduct a study on the subject. Big Business and SMME’s refers to corporate
South Africa.
F1 TEAM 11
(a) Department of Transport
The Department of transport’s main needs and priorities with regard to motor insurance are as
follows:
(i) Road Safety:
As indicated in section 2.2, the majority of road accident are as a result of behaviour issues. A
calculation was done on the road fatalities per 100 000 cars comparing the averages of countries
with compulsory insurance, versus countries without. The graph below shows that countries with
compulsory 3rd party insurance have a lower average than those without. There is a widely
accepted school of thought that motorists’ behaviour changes when they have to pay for
insurance. As mentioned above, there is a significant number of un-roadworthy vehicles in South
Africa, and the age/roadworthiness of vehicles is one of the contributing factors to high accident
rates. An increase in the number of insured cars could result in a decrease in the number of un-
roadworthy cards.
Chart 2: Fatalities per 100k vehicles
(ii) Law Enforcement:
It has been established through interviews of industry experts that the Department of Transport
is generally concerned with developing solutions that can be enforced. Whatever solution is
proposed as part of this project needs to be possible for law enforcement agencies in the country
to implement and monitor. The number of traffic officers on the roads needs to be increased.
12
894
77 9
412
62
-
200
400
600
800
1 000
Developed Developing Newly Industrialised
Fatalities per 100k vehicles
No 3rd Party Insurance 3rd Party Insurance
F1 TEAM 12
(b) National Treasury
(i) Economic Growth:
The National Treasury is concerned about the economic growth rates in South Africa, which are
currently significantly lower than the African and emerging economy averages. It needs to be
demonstrated that the introduction of compulsory 3rd party insurance will result in an increase in
the economy and consequently, unemployment. An increase in the economy would be as a result
of increased revenues for panel-beating companies as a result of an increase in the number of
vehicles that are able to repair after an accident or damage.
(ii) Revenue Growth:
Revenue growth is a direct result of the increase in the economic growth rate. If there are more
companies generating higher revenues, then the fiscus is increased. An increase in employment
rate can also contribute.
(iii) Consumer Protection:
The solution generated needs to be ultimately in the best interest of the motorist and South
Africans at large. Any solution that is biased towards increasing profits for big corporates will be
met with resistance.
(iv) Financial Inclusion:
The government is concerned with financial inclusion. Financial inclusion in this target market is
currently very low. Financial inclusion is the proportion of South Africans using financial products
and services, formally or informally. The concept has gained the South African government’s
attention and recognition as a vehicle for sustainable and inclusive growth and development. In
addition, government in recent years has undertaken a number of initiatives to accelerate financial
inclusion. The opportunity identified is particularly with regard to increased inclusion in the banking
and insurance sector. Improving the South African motor penetration rate will result in a
significantly improvement in the financial inclusion.
(v) SMME Growth:
An increased pool of insured vehicles will result in an increase in revenue for panel beaters, which
are generally black owned SMME’s.
F1 TEAM 13
(vi) International Relations
The SADC protocol on Transport, Communications and Meteorology has mandated member
states to investigate mechanisms for the creation of a harmonised system of third party insurance
in the Region. South is the biggest economy in the region, and whatever policies are implemented
here will have a significant impact on the region as a whole.
(vii) Equity & Fairness:
It is very important that the financial burden of road accidents in South Africa is borne evenly by
all motorists. Currently it is disproportionally carried by the 30% who are insured. Compulsory 3rd
Party Insurance would address this issue by spreading the risk more evenly amongst motorists.
(viii) International Benchmarking
It is important to demonstrate that there are countries that have implemented compulsory 3rd party
insurance, in the developing world, developed world and emerging markets. The designed
solution needs to demonstrate that learnings have been taken from these international examples.
From the study conducted, it appears that all countries have introduced a statutory limit to the
cover. However, these limits seem to vary significantly between developed and developing
countries. The cover limit is per incident, not annual. With the exception of Ghana, the
determination of premiums is left to the competition between insurers. There are currently no
government underwritten schemes. All countries allow individual insurance companies to
underwrite. The majority of the countries require that the vehicle is insured, whilst some require
that a driver is insured before they drive any vehicle. (Refer to Appendix
6.3 Insurance Industry
Insurance companies are also a user and buyer of third party insurance because they have to
implement most of the policy aspects. While insurance companies are also businesses they have
a significant vested interest in motor vehicle accidents and their associated costs. Specifically,
the largest risk insurance companies’ face is that of insured vehicles having accidents with
uninsured vehicles. We have already estimated the probability of this event at 70%. This forces
insurance to increase premiums due to the unsustainable business risks. This has the further
impact of reducing the number of insured vehicles further thereby denting business growth. In
some insurance companies that fail to collect losses from accidents introduce unreasonable
controls which further reduce consumer trust. This increases the number of uninsured vehicles.
F1 TEAM 14
6.4 Civil Organisations and Organised Labour
Civil Society refers to stakeholders such as Cosatu and Nedlac. Due to their immense political
power and ability to sway public opinion in South Africa, it is very important to consider their needs
and design an approach that will satisfy them. South Africa is a country where social partners
have historically been involved in tripartite consultations on economic and financial policy choices.
The experience of trade union involvement is relevant beyond this particular country inasmuch as
it shows the relationship between policy choices in domains, which may seem unrelated to the
issues of conventional in social dialogue, and employment. The financial system of South Africa
is a two-tier system. On the one hand, South Africa is home to highly developed, competitive
financial sectors and it is regarded as one of the ten largest financial markets in the world, (2010,
Ludwig). Its high quality financial products are deemed to be tailored for privileged elite and large
companies.
6.5 Business Case
After all the above into consideration, the following options were selected for consideration:
Option 1: Compulsory 3rd party insurance, at R45 per vehicle monthly, with cover up to
R50 000 per incident, obtained on registration of the vehicle, administered by individual
insurance companies, and enforced through the display of a car disc.
Option 2: Compulsory 3rd party insurance, at R45 per motorist monthly, with cover up to
R25 000 per incident, obtained on getting a driver’s licence, administered by individual
insurance companies, and enforced through the display of an insurance certificate
(a) Financial Summary (Refer to Appendix D for detailed calculations)
The financials indicate the following:
Option 1
After tax profits for insurance companies will increase by R1bn in the first year of implementation
up to R4.5 bn by the 10th year. The auto repair industry will benefit by seeing an increase of
R384m in profits growing to R538m in 10 years. Government will see a net revenue of R500m in
the first year, growing to about R2bn in 10 years. This appears to be a financially sustainable
model.
Option 2
After tax profits for insurance companies will increase by R1.5bn in the first year of implementation
up to R4.6 bn by the 10th year. The auto repair industry will benefit by seeing an increase of
R300m in profits growing to R428m in 10 years. Government will see a net revenue of R653m in
F1 TEAM 15
the first year, growing to about R2bn in 10 years. This also appears to be a financially sustainable
model. Other factors need to be considered in the cost benefit analysis below:
(b) Cost Benefit Analysis
Table 1: Cost vs Benefit Analysis
Driver/ Stakeholder Desired Outcome Weighting Option 1 Option 2 Option 1 Option 2 Comment
Affordable Insurance 1.00 5 5 4.30 4.30 Both options cost R45 per month.
Safety 0.50 2 2 1.00 1.00
Financial Security 1.00 4 1 4.00 1.00
Option 1 has a cover limit of R50 000.
Option only covers up to R25 000.
Quality of Service 0.20 4.00 4.00
Neither option would have an impact
on the quality of service
De
par
t
me
nt
of
Tran
spo
rt
Ease of Enforcement 0.6 4.00 2.00
Car discs under option 1 are easier to
enforce that insurance certificates.
Economic Growth 0.4 4.50 4.80 As per the business case
Revenue Growth 0.4 4.50 4.80 As per the business case
Financial Inclusion 0.4 4.00 4.00
SMME Growth 0.40 4.50 4.80 As per the business case
SADC Protocol 0.40 5.00 5.00
Fairness and Equity 0.40 5.00 5.00
Profitability 1.00 4.5 4.5 4.50 4.80
As per the business case, both
options are almost equally profitable.
Efficient
administration and
logistics 0.8 4.50 2.00
The short term industry is already
designed to administer vehicles and
assets, and not individuals, as per
option 2. The industry would
therefore be better able to run
option 1 more efficiently.
53.80 47.50
Scoring (1-5) Weighted Score
Mo
tori
sts
Nat
ion
al T
reas
ury
Insu
ran
ce In
du
stry
F1 TEAM 16
7 EVALUATION
Table 2: Evaluation of the selected option
Overall, it is concluded that the desired outcomes are generally met.
Driver/
Stakeholder Desired Outcome
Outcome
Met? Comment
Affordable Insurance
2
The selected option costs monthly premium of R45. This is cheaper that the current average of
R50 for 3rd party cover. During the survery of motorists, it was determined that the majority of
un-insured and insured motorists found affordability to be the most important factor when
deciging whether or not to take out insurance.
Safety
0There is no quantifiable proof that compulosry insurance would result in incresed safety.
However, there is a general school of thought that if all motorists have to pay for insurance, this
would modify their driving habits for the better, thus resulting in a reduction in road accidents.
Financial Security
0
The average cost of repairs is currently R32 000. The fact that the cover limit is R50 000 means that
the majority of motorists would be able to cover the damage costs. This would mean a significant
reduction in the risk of payout. However, motorists still have to cover the costs to their own
vehicles if they do not have comprehensive insuramce. This outcome is therefore not met fully.
Quality of Service
2
The roll out of compulsory insurance would result in an increase in accredited and certified panel
beaters. That would mean better and higher access to quality panel beating service for the
majority of motorists.
Road Safety 0 Refer to above
Law Enforcement
2
The selected option include an increase in the number of traffic police in order to ensure that all
motorists on the road are covered. According to the business case, the scheme would be able to
fund the additional costs therein.
Economic Growth
2
The increase in the revenue for insurance companies would result in the employment of
additional staff. The hiring of additional staff for traffic police would also reduce unemployment.
The increase in the number of panel beaters would also result in additional panelbeaters finding
employment. Increased employment means economic growth.
Revenue Growth
2
According to the business case, the tax base for government would increase significantly. The
first source of revenue is the additional value added tax (VAT) on the premiums. The second
source is the income tax on the increased profits for insurance companies. The third option is the
additional tax from the increased number of panel beaters.
Financial Inclusion2
Introducing compulsory 3rd party insurance would result in an additional 6 million motorists
gaining access to the financial services market.
SMME Growth 2 An incresae in panelbeaters would result in SMME growth.
SADC Protocol2
Rolling out this plan would enable government to meet its obligations with regard to the SADC
protocol.
Fairness and Equity2
Compulsory 3rd party insurance means that the burden of the risk is shared more fairly amongst
all motorists.
Profitability2
According to the business case, profits would result increase for the industry by about R1.5
billion from year 1 and increase marginally over the years after the initial capital outlays.
Efficient administration and logistics
0
The administration of the scheme is run fully by insurance companies. This means that insurers
are left to compete amongst each other to provide efficient and afforable service to the
policyholders. This is considered to be significantly better than a scheme being run centrally by
government, such as the Road Accident Fund.
-2
Whilst the recommended premium of R45 is considered to be affordable for the majority of
policyholders, Labour unions might not be in support of any scheme that would result in
additional costs for their members. This is due to the fact that they consider their members to be
already paying to high a cost for being on the road. This was evident in their protest to e-tolls in
Gauteng.
Mo
tori
sts
De
par
tme
n
t o
f
Tran
spo
rt
Nat
ion
al T
reas
ury
Insu
ran
ce In
du
stry
Civ
il S
oci
ety
Affordable Insurance
Legends
2 Outcome fully met
0 Outcome partically met
-2 Outcome not met
F1 TEAM 17
7.1 Implementation Plan
Table 3: Implementation Plan
7.2 Measurement of Success
The following key performance indicators need to be tracked to check the success of the
scheme:
SAIA
Representative
Insurance
Companies
Minister of
Transport
Minister of
Finance
Parliamentary
sub-committee NCOP
National
Assembly
Minister of
Tourism
Internati
onal
Relations
Minister
of Trade
&
Industry
Stakeholder Buy-In
Present the business case at SAIA
conference a
Obtain Feedback from SAIA members a
Present the business case to the
finance minister a
Present the business case at NEDLAC a
Draft Bill and Legislation
Prepare a Green Paper on Compulsory
3rd Party insurance a
Publish Green Paper for comments a
Draft a White Paper after obtaining
public comments and refining
accordingly a
Submit White Paper to the National
Assembly a
Refer the bill to the transport sub-
committee a
Publish the bill in the Government
Gazette a
Submit the draft bill to the national
assembly a
Submit the draft bill to the NCOP for
concurrence a
Submit the draft bill to the president
for assent a
The bill becomes an ACT
Implementation
Develop products that meet the
minimum requiremenents for 3rd
party insurancea
Publish/ advertise the need to take up
3rd party insurance by a set datea
Hire 15 000 additional traffic police aCommunicate the need for 3rd party
insurance before travelling to South
Africa to tourism agenciesa
Communicate the need for 3rd party
insurance before travelling to South
Africa to consulates and embassies
abroad
a
Roll out the system that integrates
eNATIS to insurance companies for
verification of cover during renewal of
licences
a a
Provide Training to enATIS staff on
how to verify insurance on the systema
Increase the number of certified
panelbeaters to meet the increased
demand, ensuring that BBBEE
objectives are advanced.
a
F1 TEAM 18
Table 4: Key Performance Indicators of Success
8 CONCLUSION
It is recommended that the following solution be implemented:
Compulsory 3rd party insurance, at R45 per vehicle monthly, with cover up to R50 000 per
incident, obtained on registration of the vehicle, administered by individual insurance
companies, and enforced through the display of a car disc. Insurance cover from other
countries, particularly SADC countries, must be recognised and accepted.
This is because the solution according to Table 1 above, has more benefits that the alternative solution.
Upon evaluation, it was also determined that this would meet the majority of desired outcomes for the
identified stakeholders.
Outcome Measure Source of measurement
Frequency
of measure
Measure
Reviewed By:
Affordable Insurance
Lapse rates on the scheme
across all the insurers SAIA Annual Annual
Road Safety
Number of road accients per
annum (before and after the
implementation) Department of Transport Annual Annual
Financial Security
Average cost of repairs per
accident vs Cover Limit (This is
to measure whether the cover is
adequate to meet the average
repair costs) SAIA Quartlerly Quartlerly
Quality of Service Customer satisfaction surveys
Retail Motor Industry
(RMI) Monthly Monthly
Law Enforcement
Number of motorists without
the compulsory cover Department of Transport Monthly Monthly
Economic Growth
Number of people employed as
a result of the scheme National Treasury Quartlerly Quartlerly
Revenue Growth
Additional Tax revenue as a
result of the scheme National Treasury Quartlerly
National
Treasury
Financial Inclusion
% of prople with access to
financial services (before and
after the scheme) National Treasury Annual
National
Treasury
SMME Growth
Number of additional
panelbeaters as a result of the
scheme
Department of Trade &
Industry Annual
National
Treasury
SADC Protocol
Whether the scheme is rolled by
the SADC deadline
Department of
International relations &
Coorperation Once -off
Department
of
International
relations &
Coorperation
Fairness and Equity
Average cost of comprehensive
insurance (before and after the
scheme). This measures
whether the scheme has
resulted in a decrease in the risk
profile of the average motorist
with cover. SAIA Quarterly
SAIA, National
Treasury
Profitability
Additional profits for insurance
companies as a result of the
scheme SAIA Quarterly
SAIA, National
Treasury
Efficient
administration and
logistics Customer satisfaction surveys Insurance Companies Monthly
Department
of Transport,
SAIA
F1 TEAM 19
Table Of References
1) Southern African Development Community (2015) SADC Protocols. [Accessed 08
November 2015] http://www.sadc.int/about-sadc/overview/sa-protocols/
2) Finscope (2011) [Accessed 28 June 2015] www.finscope.co.za
3) Official South African road safety data is supplied by the Road Traffic Management
Corporation (RTMC). This info graphic uses data from the RTMC's most recent Road
Traffic - Report for South Africa, issued in March 2011, to ensure accuracy, data used
for comparisons is also taken from 2011 sources.)
4) Smith, W. (2014). Sustainability of Motor Vehicle Insurance including the Lack of Third
Party Liability Cover for Damage to Property and the Effects Thereof.
5) World Health Organization (2011) Road Safety is a global public health issue [Accessed
13 August 2015] http://www.euro.who.int/en/countries/turkey/publications/road-safety-is-
a-global-public-health-issue
6) Wikipedia Organization (2015) List of countries by traffic related deaths [Accessed 24
September 2015] https://en.wikipedia.org/wiki/List_of_countries_by_traffic-
related_death_rate
7) Van Den Berg, D, Winterboer, T, Muguto, V et al (2015) Insurance Industry Analysis.
PriceWaterHouseCoopers, 5,
8) SAIA, (2010) Compulsory Third Party Motor Property Insurance in South Africa. SAIA
working paper. SAIA
9) Bester CJ, 2011. A Relationship Between Accident Types and Causes
10) Astrop A, 2012. Socio-economic Aspects of Road Accidents in Developing Countries
11) Swenson D, Eathington L, 2012. The Economic Impact of the Insurance Industry
12) Anderson FJ, 2012. Risk and Insurance
13) Gonulal S, 2010. Motor Third-Party Liability Insurance
14) Dale L, 2012. Advantages and Disadvantages of Third Party Motor Insurance
(C: The Advantages And Disadvantages Of 3rd Party Motor Insurance.htm(Accessed:
29/10/2015)
15) Karanzingi S, 2011. HARMONISATION OF THIRD PARTY MOTOR VEHICLE
INSURANCE SCHEME FOR THE COMESA/SADC/EAC REGION
F1 TEAM 20
Appendix A: Results Of Motorist Surveys
Customer survey Results
47% 50%
6%17%
47% 17%
0%17%
0%
20%
40%
60%
80%
100%
Yes No
Is your vehicle insured (Broken down by employment status)
Full Time Part-time Self Employed Unemployed
19%
81%
Male participants (Is your vehicle insured?)
No Yes
43%
57%
Female participants (Is your vehicle insured?)
No Yes
F1 TEAM 21
17%
67%
17%
Un-insured motorists( Broken down by Income Brackets)
Not Stated R26K-R35K R56K and above
50%50%
Un-insured motorists( Broken down by Gender)
Female Male
50%
17%
33%
Un-insured motorists( Broken down by Age of vehicle)
0 to 5 years 11 to 15 years 6 to 9 years
F1 TEAM 22
Appendix B: Inter-Relationship Diagram
83%
17%
Un-insured motorists( Broken down by Reason for un-insurance)
Affordability Car too old
F1 TEAM 23
Appendix C: Implementation Of Compulsory 3rd Party Insurance In Other Countries
CountryLimit Cover
(in ZAR) *
Premium
Regulated?Car/Driver
Premium
Collection &
Administrati
on
Enforcement
Austria R 15 000 000 No Car
Individual
insurance
companies
On car
registration
Belgium R 15 000 000 No Car
Individual
insurance
companies
Green Card
displayed on car
Denmark R 204 000 000 No Car
Individual
insurance
companies
On car
registration
France R 15 000 000 No Car
Individual
insurance
companies
Display tag on
windscreen
Germany R 15 000 000 No Driver
Individual
insurance
companies
The insurance
certificate
(Versicherungsz
ertifikat) must be
carried at all
times. There are
penalties for
drivers of
vehicles without
valid insurance.
Ghana R 350 Yes Driver
Individual
insurance
companies
Certificate of
insurance
Malawi R 5 900 No Car
Individual
insurance
companies
Comesa Yellow
Card
Mozambique R 94 000 No Car
Individual
insurance
companies
Comesa Yellow
Card
Nigeria R 67 000 No Driver
Individual
insurance
companies
Car Tag
Russia R 24 000 No Driver
The OSAGO
policy must be
carried at all
times while
driving. Together
with the
insurance
contract and the
policy paper
United Arab Emirates R 1 833 000 No Car
Individual
insurance
companies
Orange Card
displayed on the
car
United Kingdom R 21 000 000 No Driver
Individual
insurance
companies
Green Card
displayed on car
Zimbabwe R 20 000 No Unclear
Individual
insurance
companies
Certificate of
insurance /
security
F1 TEAM 24
Appendix D: Detailed Calculation of Profitability
Option 1:
ASSUMPTIONS
Inflation Rate 6%
Vehicle growth rate * 2.0%
Expense ratio 13.6%
% of premiums paid to Department of Transport 5%
Additional Traffic Personel 20 000
Effective Tax rate 25%
Auto-repair margins 20%
% of vehicles involving a 3rd party 10%
INSURERS: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Gross Written Premium per annum (Rmillion) 5 508 5 955 6 439 6 962 7 527 8 138 8 799 9 513 10 286 11 121
Premium per Policy per month 45R 48R 51R 54R 57R 60R 64R 68R 72R 76R
Number of registered vehicles (millions) 10 10 10 11 11 11 11 11 12 12 12
Claims per annum (Rmillion) 3 196 3 325 3 460 3 599 3 745 3 896 4 053 4 217 4 388 4 565
Cover Limit 50 000R 51 000R 52 020R 53 060R 54 122R 55 204R 56 308R 57 434R 58 583R 59 755R 60 950R
Average cost of repairs 32 000R 32 640R 33 293R 33 959R 34 638R 35 331R 36 037R 36 758R 37 493R 38 243R 39 008R
Average payout 32 000R 32 640R 33 293R 33 959R 34 638R 35 331R 36 037R 36 758R 37 493R 38 243R 39 008R
Number of car accidents involving a 3rd party 96 000 97 920 99 878 101 876 103 913 105 992 108 112 110 274 112 479 114 729 117 023
Underwriting Profits/(Losses) 2 312 2 630 2 979 3 362 3 782 4 242 4 745 5 296 5 898 6 556
Expenses (Rmillion) 1 039 1 123 1 213 1 310 1 415 1 514 1 637 1 769 1 913 2 069
Operating expenses 749 810 876 947 1 024 1 107 1 197 1 294 1 399 1 512
Payments to the Department of Transport * 275 298 322 348 376 407 440 476 514 556
Armotization Investment in technology (Rmillion) 75 15 15 15 15 15
Net Profits before Tax 1 272 1 507 1 767 2 052 2 367 2 728 3 109 3 527 3 985 4 488
AUTO REPAIR INDUSTRY
Additional Revenue (Rmillion) 1 918R 1 995R 2 076R 2 160R 2 247R 2 338R 2 432R 2 530R 2 633R 2 739R
Additional Expenses (Rmillion) 1 534R 1 596R 1 661R 1 728R 1 797R 1 870R 1 946R 2 024R 2 106R 2 191R
Additional Profits before taxation (Rmillion) 384R 399R 415R 432R 449R 468R 486R 506R 527R 548R
DEPARTMENT OF TRANSPORT:
Revenue
Receipts from Insurers 275R 298R 322R 348R 376R 407R 440R 476R 514R 556R
Expenses (Rmillion) 362 382 410 434 466 500 537 577 620 667
Salaries of additional traffic personell 300 324 351 379 410 443 479 518 560 606
Technology Investment 5 1 1 1 1 1
Training 10 5 5
Annual Disc printing costs 51 52 53 54 55 56 57 59 60 61
Net Income -87 -85 -88 -86 -90 -93 -97 -101 -106 -111
NATIONAL TREASURY 592 688 793 908 1 036 1 181 1 334 1 502 1 686 1 887
Income Tax Revenue 414R 477R 545R 621R 704R 799R 899R 1 008R 1 128R 1 259R
VAT Expense -593R -623R -654R -687R -722R -757R -797R -838R -882R -929R
VAT Revenue 771R 834R 901R 975R 1 054R 1 139R 1 232R 1 332R 1 440R 1 557R
Net Income for Government 506 603 705 822 946 1 088 1 237 1 401 1 580 1 777
F1 TEAM 25
Option 2:
ASSUMPTIONS
Inflation Rate 6%
Vehicle growth rate * 2.0%
Expense ratio 13.6%
% of premiums paid to Department of Transport 5%
Additional Traffic Personel 15 000
Effective Tax rate 25%
Auto-repair margins 20%
Number of cars per licenced driver 1.1
% of vehicles involving a 3rd party 10%
INSURERS: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Gross Written Premium per annum (Rmillion) 5 007 5 414 5 853 6 329 6 843 7 398 7 999 8 649 9 351 10 110
Premium per Policy per month 45R 48R 51R 54R 57R 60R 64R 68R 72R 76R
Number of licenced drivers with cars (millions) 9 9 9 10 10 10 10 10 11 11 11
Claims per annum (Rmillion) 2 497 2 598 2 703 2 812 2 926 3 044 3 167 3 295 3 428 3 566
Cover Limit 25 000R 25 500R 26 010R 26 530R 27 061R 27 602R 28 154R 28 717R 29 291R 29 877R 30 475R
Average cost of repairs 32 000R 32 640R 33 293R 33 959R 34 638R 35 331R 36 037R 36 758R 37 493R 38 243R 39 008R
Average payout 25 000R 25 500R 26 010R 26 530R 27 061R 27 602R 28 154R 28 717R 29 291R 29 877R 30 475R
Number of car accidents involving a 3rd party 96 000 97 920 99 878 101 876 103 913 105 992 108 112 110 274 112 479 114 729 117 023
Underwriting Profits/(Losses) 2 510 2 816 3 151 3 517 3 917 4 355 4 832 5 354 5 923 6 544
Expenses (Rmillion) 946 1 022 1 104 1 192 1 288 1 376 1 488 1 609 1 739 1 880
Operating expenses 681 736 796 861 931 1 006 1 088 1 176 1 272 1 375
Payments to the Department of Transport * 250 271 293 316 342 370 400 432 468 506
Armotization Investment in technology (Rmillion) 75 15 15 15 15 15
Net Profits before Tax 1 564 1 794 2 047 2 325 2 629 2 978 3 344 3 745 4 184 4 663
AUTO REPAIR INDUSTRY
Additional Revenue (Rmillion) 1 498R 1 559R 1 622R 1 687R 1 755R 1 826R 1 900R 1 977R 2 057R 2 140R
Additional Expenses (Rmillion) 1 199R 1 247R 1 297R 1 350R 1 404R 1 461R 1 520R 1 581R 1 645R 1 712R
Additional Profits before taxation (Rmillion) 300R 312R 324R 337R 351R 365R 380R 395R 411R 428R
DEPARTMENT OF TRANSPORT:
Revenue
Receipts from Insurers 250R 271R 293R 316R 342R 370R 400R 432R 468R 506R
Expenses (Rmillion) 282 297 317 335 359 384 412 442 474 510
Salaries of additional traffic personell 225 243 263 284 307 332 359 389 420 454
Technology Investment 5 1 1 1 1 1
Training 10 5 5
Annual Disc printing costs 46 47 48 49 50 51 52 53 54 55
Net Income -32 -26 -25 -18 -17 -14 -12 -9 -7 -4
NATIONAL TREASURY 685 778 879 991 1 113 1 253 1 399 1 559 1 735 1 926
Income Tax Revenue 466R 526R 593R 666R 745R 836R 931R 1 035R 1 149R 1 273R
VAT Expense -482R -507R -533R -561R -590R -619R -652R -686R -723R -763R
VAT Revenue 701R 758R 819R 886R 958R 1 036R 1 120R 1 211R 1 309R 1 415R
Net Income for Government 653 752 855 973 1 097 1 239 1 388 1 550 1 728 1 921
F1 TEAM 26
Appendix E:Number of Insured and Un-Insured cars
Chart 1: Number of insured vs uninsured vehicles (eNATIS, 2011)