Motor insurance premium: The system is outmoded

NST,Wednesday 12 October 2011 

In responding to the 2012 Budget, Datuk Aslah Abdullah, president of the Kuala Lumpur and Selangor Taxi Operators Association, was reported to have said that the exemption on excise duty and sales tax would ease the burden on taxi owners. 

However, Aslah said the abolishment of the road tax for individually owned taxis would not help much as it cost only RM15 every year. 

“It is not the road tax that is burdensome. It is the insurance premium every year that is expensive. Many of them cannot afford it,” he was reported to have said. 

Many attempts have been made to revise the motor tariff but were unsuccessful. A new approach is needed to break the deadlock. 

What all parties should strive for is a more equitable method to determine the motor insurance premiums for cars. 

Excluding the first RM1,000 sum insured, the motor tariff for a taxi is RM69.80 per thousand of the insured value, compared to only RM26.00 for private cars. As a result, taxi companies normally insure their vehicles under third party cover. 

Should a taxi be stolen or totally wrecked in an accident, the driver need not settle the balance of instalments but loses out all payments made, including the deposit. The risk is borne more by the taxi company initially, until it shifts to the driver. 

Drivers with own permits are required by the banks to insure their taxis under comprehensive cover to obtain financing. If they fancy operating a presentable taxi, insuring one for RM71,000 would incur an annual premium of RM5,942, including for flood and civil commotion.

This RM600 monthly cost is just for the basic premium without loading, windscreen cover and excluding other charges. Imagine the insurance costs for those operating executive taxis using engines of 2.0 litres and above. 

However, operators using cars licensed under limousine taxis will gladly pay the rate charged for public taxis. Illogically, their cars attract a premium of RM102.50 per thousand or 47 per cent higher when they are actually at lower risk. 

Some insurance companies would argue that high-value passengers travel in limousine taxis. It does not hold water because there is a mandatory insurance called “passenger risk cover” which must be paid for each passenger seat, at RM19.50 per year. 

Passengers for vehicles licensed under “hire-and-drive” can be similarly insured under “legal liability to passengers” at a higher cost, at RM60 for each passenger seat per year. Insurance premium for these vehicles under comprehensive cover is RM122.10 per thousand or 4.7 times higher than private cars! 

Contrary to popular belief, most self-drive cars are not hired out over a weekend whereby customers clock hundreds of kilometers traveling outstation. They are mainly rented by large corporate customers for their senior executives. 

Many are expatriates and they clock lesser mileage than the locals. On weekends, they tend to fly off for their holidays around the country or region. As such, “hire-and-drive” cars are not high-risks as falsely perceived. 

That all major car rental companies insure their vehicles under third party cover is testament to this fact. The difference in premiums between comprehensive and third party is more than sufficient to cover the costs of all stolen and damaged cars for the year. 

This proves that the existing motor tariff, unrevised since the 1970s, is an archaic, outmoded table of premiums lacking in logic and basis. 

Actuaries are mathematical wizards and their precise calculations have made insurance affordable and insurers afloat. However, the motor tariff does not appear to be the work of any actuary. Anyone with a good head of figures would have done much better. 

Comprehensive premiums for limousine taxis and hire-and-drive cars were swapped and rectified later. The engine size for all cars is classified under eight categories is another clear indication of its irrelevance. There are for below 1400cc, 1650cc, 2200cc, 3050cc, 4100cc, 4250cc, 4400cc and over 4400cc. 

The last four categories represent less than one percent of the cars on Malaysian roads. There is no need for such classification as calculation will be more consistent on a straight-line basis. In fact, just three simple formulas are sufficient to arrive at a fair insurance premium for all cars. 

The formula for third party premium is 10/20/30. Based on engine size, private cars at 10 sen per cc, taxis including limousines at 20 sen and hire-and-drive cars at 30 sen. For engines with exactly 2,000cc, it will work out to RM200, RM400 ad RM600 compared the current premiums of RM90, RM342, RM389 and RM1,197 respectively. 

The formula for comprehensive cover for the first RM1,000 sum insured is 20/30/40. This will work out to RM400, RM600, RM800 for the same three categories compared with the current premiums of RM277.90, RM523.10, RM767.80 and RM 915.50 respectively. 

The formulae for subsequent RM1,000 insured is 25/40/50. To cover for RM100,000, the premiums will be RM2,500, RM4,000 and RM5,000 compared with the current premiums of RM2,600, RM6,980, RM10,250 and RM12,210 respectively. 

For private cars, the current no claim discount after one year is 25 per cent, rising to 30 per cent, 38.33 per cent, 45 per cent and 55 per cent after five years. They are much lower for commercial vehicles. 

It should be standardized for all cars, starting at 10 per cent, rising by 10 per cent yearly capping at 50 per cent, all without an excess clause. 

However, an excess amount of RM300 can be imposed after a claim in addition to the forfeiture of no claim discount. The excess to be increased by RM300 for every year when claims are made, capping at RM1,500. For every claims-free year, the excess amount is to be reduced by RM300 per year. 

Drivers would be more mindful when the carrot-and-stick method used is clear and simple. However, it is unlikely for the stakeholders to accept these new proposals. The insurers will contend that such a revision is still too low to sustain their business whereas the insured will argue it is still too high. 

It will be up to Bank Negara, the neutral party and regulator, to put the foot down. To continue using a financial instrument that was badly designed in the 1970s does not bode well. 

Insurers that run a tight ship and plug leakages will find the motor portfolio profitable. For this, the various authorities must also work with the motor assemblers and insurers to reduce thefts and accidents. 

YS Chan 

Kuala Lumpur