Motor Insurance. From Tax to Benefit. Yves-Daniel Cochand - Global Insurance Conference 2011

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1 Motor Insurance From Tax to Benefit Yves-Daniel Cochand - Global Insurance Conference 2011

2 Four perspectives Government Victim Insured Insurer 2

3 Government perspective What is the right dose of intervention? Level of regulation Solvency system Ta xe s other 3

4 Level of regulation From monopolistic systems to full deregulation Regulation can extend to Rate s Product (policy form) Limits of ins urance The level of (de-)regulation will depend on many factors, such as political landscape, social environment, economic development, technology, legal situation A low level of regulation should be the ultimate goal Motor Insurance needs to remain mandatory however, as well as minimum limits per event defined No unlimited insurance! Access to data is key. This is an issue for the fully deregulated markets. 4

5 Solvency framework From easily applicable minimum requirements to complex qualitative and quantitative approaches In emerging countries, minimum requirements are also necessary Incre ase in market dis cipline Protection of victims and insured persons Two particular aspects for Motor Reserves: easily applicable mechanisms as a minimum. Challenge of missing data at first implementation Reinsurance: to be taken into account at early stage of solvency framework development A comprehensive, qualitative and quantitative solvency system should be the ultimate goal Reserves: adequate level Reinsurance: effects of proportional and non-proportional reinsurance to be fully accounted for 5

6 Taxes Drivers are a worldwide tax target Motor Insurance premium is very often used as basis for tax payments If it is the case, transparency is crucial (how much goes to the state and how much to the insurer) To eliminate the perception that Motor Insurance is a tax, it is probably necessary to fully separate tax collection from Motor Insurance premium payments (e.g. collection, by a state service, together with the authorisation to use a vehicle) 6

7 Victim's perspective Quick and fair indemnification Access to judicial system Indemnification of large bodily injury claims Fund for uninsured vehicles other 7

8 Access to judicial system Fair trial Application of the rule of law is an obvious prerequisite Access for all victims and insured persons to judicial system (legal protection) A minimum level of similarity between the various jurisdictions of a given state is crucial Important aspects for Motor Insurance are Speed Independence No unnecessary process costs Prompt, adequate medical attention 8

9 Indemnification of large bodily injury claims A good level of predictability is key This is a key element of a properly functioning Motor Insurance system Components of prejudice and indemnification well defined or left to judicial appre ciation? e.g. Loss of earnings Me dical cos ts, re habilitation Costs of care Pain and suffering Amount of indemnification Market usage/yardstick vs. judicial appreciation? Lump sum payment vs. structured settlements (annuities)? The ultimate goal should be a reasonable level of predictability of future claims payments, which can occur up to10 to 20 years after the accident (e.g. quadriple gic child) 9

10 Fund for victims of uninsured vehicles A must have in a fair Motor Insurance system This is an obvious requirement of a properly functioning Motor Insurance market Funding may appear as a tax, which is why states and insurers should take all necessary steps to detect uninsured vehicles and/or drivers 10

11 Insured's perspective Product efficiency Transparency of price and product Distribution and administration costs Corruption and fraud other 11

12 Transparency of price and product Necessary consequence of deregulation In a strictly regulated market, price and product are standard Choice of insurer is not linked to price and product Contributes to the perception that Motor Insurance is rather a tax than a benefit In a deregulated market, the insured takes advantage of the competition between insurers Experience shows that Motor Insurance is very often a price driven market! Variation of products leads to tailor made insurance coverage Comparison tools are key Cons ume r organis ations play an important role (market playe rs se lf-dis cipline) Free choice of insurer is a prerequisite 12

13 Distribution and administration costs Pressure on insurers and traditional channels Transparency on distribution costs is necessary to a favourable perception of Motor Insurance market by the insured From brokers and agents distribution to various Direct channels, e.g. Mutuals without inte rme diarie s Dire ct ins urance companie s (including inte rnet se lling) Banks Trend towards multi-channel distribution and higher cost efficiency Administration costs: transparency is key Pressure by regulator in regulated markets Pressure by market competition in deregulated markets An ideal Motor Insurance market is multi-channel. A deregulated market increases the pressure on administrative costs. 13

14 Corruption and fraud A plague to fight with strong determination This is an obvious requirement There is no serious alternative to a zero-tolerance approach Insurers and policyholders can and have to play an active role in fight against fraud 14

15 Insurer's perspective Fair competition Liability vs. no fault system Access to reinsurance other 15

16 Fair competition Avoid unnecessary hurdles Similar supe rvision for all insurance playe rs Mutuals Limite d companie s Banks No unnecessary hurdles for start-ups No unne ce ssary limitations of insurance lice nse s High degree of vigilance of anti-trust authorities during deregulation phases 16

17 Liability vs. no fault system Avoid long lasting legal procedures on responsibility Historically, lawmakers first defined Motor Liability very broadly. The burden of proof for responsibility was with the victim. Since then Motor Liability law has more or less everywhere evolved in the dire ction of a strict Liability Some lawmakers have taken the path of pure no-fault system, in which Motor Insurance can be assimilated to a large degree to a social security fe ature There are many variations in between The ultimate goal of the lawmaker should be to choose a system ensuring long procedures on responsibility are avoided 17

18 Access to reinsurance Avoid international hurdles Access to reinsurance is essential to a fair and competitive Motor Insurance market Proportional reinsurance is an excellent tool for solvency and capital management, as well as for support for start-ups Non-proportional reinsurance reduces volatility and absorbs large losses: large bodily injury claims, Motor Physical Damage for high value cars, Motor Physical Damage for Catastrophic events (e.g. hail, wind, flood, earthquake) Re insurance market is a worldwide market The ultimate goal should be a system allowing access for all local insurance players to the international market Avoiding unnecessary hurdles, such as mandatory cessions or punitive taxes Avoiding requirements for collaterals 18

19 Conclusion There are no Motor Insurance systems which are totally wrong or totally right. The adequate system for a given state at a given time will depend on external factors such as political landscape, social environment, economic development, technology, legal situation Ultimately it is always a political decision, in which the lawmakers and governments have to take into account the interests of various stakeholders, which will often be contradictory The road to an ideal Motor Insurance system is long, rocky and non-linear 19

20 Thank you

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