Development Trends in Motor Insurance in Poland - Selected Issues on the Example of the Adequacy of the Premiums

Transcription

1 Development Trends in Motor Insurance in Poland - Selected Issues on the Example of the Adequacy of the Premiums Ilona Tomaszewska Warsaw School of Economics, Institute of Risk and Financial Markets, Poland ilona.tomaszewska@sgh.waw.pl Abstract. Technical loss recorded by insurance companies in MTPL (Motor Third Party Liability) historically has never been so huge. It reached a level of over 1 billion PLN (appx. 233 M Euro). In addition, usually in profitable casco insurance (damage and theft) also demonstrated a significant decrease in profitability. The Polish Motor insurance market is characterized by a heavy regulation as well as a very competitive environment. There is a consolidation of the insurance market and changing of the profile activity from direct to multichannel. Unfortunately, Motor insurance is a loss-making product, which is used to attract customers to whom it is then possible to cross-sell more profitable products such as Personal Accident, Tires, Assistance and other riders. 4Q of 2015 and 2016 was the period of increasing pricing in Motor insurance, especially in MTPL to ensure a sufficient level of profitability on the Motor product. However, Motor profitability significantly deteriorated in 2014, and the deterioration continued in 2015 with slight improvement in The main reasons for such deterioration were: 1) Loss on the insurance market, in particular with regard to MTPL, mainly due to the inadequacy of the premiums that insurance companies charge from customers. 2) The inadequacy of contributions is due to two main factors: very low premiums resulting from the price war between insurance companies and rising costs, especially in terms of the amount of compensation paid and benefits. 3) The impact to increase the costs relating to the claims and compensations are mainly due to changes in the regulations, recommendations of supervision and court rulings. 4) There is a inflation cost, mainly in the field of BI The currently rising premiums in motor insurance may not be sufficient due to the planned changes by the government, such as the introduction of a Religa bis tax (co-funding for the treatment of road victims) or paying compensation in car damage only on the invoice system (no cash). This research is based on the analysis of: legislative, judicial decisions and recommendations of the supervisory authority insurance indicators on the basis of the data available on the websites of supervisory authority and annual reports of insurance companies observation of the insurance market and ongoing trends in the amount of the premium, the level of damage and compensation and the method of claim process. Keywords: premium, motor insurance, technical loss, premium adequacy 365

2 1 Motor Insurance. Mandatory Issue. Motor insurance refers to the insurance related to motor and land vehicles in connection with the movement of such vehicles. Motor insurance covers a whole range of insurance products dedicated to protect both the owner of the vehicle, the driver of the vehicle and, often, also the passengers. However, the most sensitive products concerning the nature of the product (obligatory vs. voluntary), the volume of premiums collected, the importance for the customer, the impact on the financial result of the insurance company, have two of them: motor third party liability (MTPL) and autocasco (Casco). The above products in their essence differ from each other diametrically. However, they have been a part of many analyses and deliberations and numerous regulations for many years due to the specific nature of risks and their importance to society and the economy. The main difference is the issue of obligatory (Insurance and Reinsurance Activity Act, art. 15, par. 2, September 11, 2015). The insurance contract is voluntary in principle. This means that neither party is obliged to conclude insurance contract and to determine the content of the contract in accordance with applicable laws (Handschke, Monkiewicz 2010, 138). Indeed, casco insurance is voluntary and the products offered between insurance companies vary in scope according to wordings (General Terms and Condition of Insurance). The specificity of MTPL refers to the protection of the property interests of victims who are liable for the damage suffered by the insured. Make the obligations in principle raises their rank and importance in the relationship between insured - the injured while guaranteeing their commonness. Mandatory is to provide the injured party with compensation claims irrespective of the solvency of the perpetrator of the damage. The main legal act regulating mandatory of MTPL is the Act of 22 May of 2003 on mandatory insurance, the Insurance Guarantee Fund (UFG) and the Polish Motor Insurers Bureau (DzU.; No: 2003/124/1152; Publication date: 16/07/2003). The content of the insurance contract and the conditions are governed by the Act, so it can t be freely formed. Being mandatory has serious consequences for the functionality of this insurance, such as: Obligation to conclude an insurance contract - art. 5 - on the one hand insuring party is obliged to conclude appropriate insurance, on the other, the insurance company being authorized to cover MTPL risk can t refuse to conclude a mandatory insurance contract. Presumption of insurance - art. 5a - the insurer's failure to respond to the customer's offer within 14 days is deemed to have been accepted by the insurance company. Sanction clause - art. 6 - the conclusion of an insurance contract in breach of the law is deemed to have been properly concluded and maintained valid. Continuity of the agreement for the next 12 months in the absence of a contract termination the day before the end of current protection (art. 28). Acquisition of the obligation to pay compensation / benefits by the UFG in case of bankruptcy (art. 98 par.2) All of the above factors make that MTPL insurance shouldn t be perceived only from the price point of view understood as the premium collected. Obviously, the obligatory of MTPL makes that premium collected in MTPL is a significant contribution of all non-life insurance premiums. However, the price is derived from the risk factors, the costs of claim process (liquidation and compensation) and all other factors. 366

3 2 Determinants of development of motor insurance market A competitive tool that can be used to gain as many customers as possible is to lower prices. According to W. Samuelson, "price is the main weapon of competitors, and usually it influenses on it the size of the market share and the level of profitability."(samuelson, Marks, 2009, 515) How important is the price when choosing MTPL? The results of a survey conducted in 2011 show that 59% of Poles consider the price as the most important factor in choosing a property insurance policy (Global Insurance Customer Survey, Ernst & Young, 2011). The price of the policy, means the amount of premium, consists of the following components: compensation and benefits - that is, net compensation and benefits (their amount is reduced by the share of the reinsurer) and costs incurred in claim process and recovery of recourses acquisition costs - ie costs of medical examinations, etc. and commissions for intermediaries administrative costs - that is, costs related to the premium collection, salaries for employees, etc. costs of reinsurance other costs - eg contributions to insurance associations Taking into consideration the above factors, the development and functioning of the motor insurance market should be viewed in two dimensions: 1) the revenue dimension, which refers to the volume of the premium and its relation to the risks incurred by the insurance companies; 2) the cost dimension, which is reflected in the costs of claim settlement. Both dimensions can t be treated separately or in isolation from the letter of law. Because of the importance of the motor insurance market for society, it is subject to numerous legal regulations. 2.1 Revenue dimension Motor insurance is regulated through numerous legal acts. On Insurance and Reinsurance Activity Act is explicitly stated that the premium paid by the customer should be set at the level of the risk incurred in the insurance product and at least to cover all the liabilities and expenses the insurance company faces. The issue of premium adequacy was also raised in the Recommendations for insurance companies concerning product management system (Recommendations for insurance companies concerning product management system, March 22, 2016). Recommendation 12 explicitly addresses two issues: 1) The premium must be based on statistic data after the risk assessment and ensure that premium revenue covers at least the costs associated with the compensation paid and the costs of insurance activity contracting the same risk. 2) The premium for the product package should be calculated taking into account the profitability per risk but not the total package. It is also clearly emphasizes the importance of proper pricing, while maintaining the whole process of analyzing the market environment, sales assumptions, product characteristics and historical data. The issue of the recommendation was, however, a consequence of earlier actions undertook by the supervisory authority. On October 2, 2012 the chairman of the Polish Financial Supervision Authority addressed to the insurance companies with a letter regarding the adequacy of insurance premiums. This was the first 367

4 clear signal from the supervisor, who pointed to the need to ensure an adequate profitability of the insurance activity. Among the actions taken to obtain it the most important should be determining the correct amount of insurance premium. The letter also stated that it was unacceptable to set premium using compensation of the risks in various insurance products in the creation of so-called insurance package. In addition, it was considered unacceptable to offer risk for free. On September 28, 2015, there was a second letter of the chairman of the Polish Financial Supervision Authority concerning the price war. The letter refers strictly to the situation of motor insurance: MTPL and casco. The chairman drown attention to the proper and adequate calculation of the premium. On the basis of data and information submitted by insurance companies in the years on the assumptions of tariffs, financial results concerning concluded insurance contracts, forecasted development and justification of the adequacy of the currently applied premiums, the conducted analysis pointed at: decreasing profitability in casco insurance resulting from higher acquisition costs and rising claims; continually incurred technical loss in MTPL; the reluctance of insurance companies to increase tariffs due to high market competition, possible revenue reductions and widely used marketing discounts; and significant impact of market and legal changes on insurance activity, including the amount of compensation and loss adjustment costs (case law and supervision recommendation) (Jakubiak, September 28, 2005). None of the supervisory signals so far have been so obvious and indicate a serious market problem associated with the mismatch of premium to the level of risk incurred, the rising cost of compensation and the process of claim settlement, the impact on the market made by law changes and the indication that the price war affects unreasonable tariff decisions that could destroy the stability of the market. In the face of such threats, the Polish Financial Supervision Authority reserves the right to use remedies. Obviously, the use of a remedy depends on the existence of a particular risk, with the indication that the policy of activity of insurance companies does not indicate a future change of the situation. At present, several insurance companies are subject to a number of checks, and few of them obtained a financial punishment for lack of premium adequacy. 2.2 Cost dimension Unadequacy of premiums can t be considered only from the perspective of its level due to risk. The inflow of new foreign cars has led to more and more insurance policies in the portfolio, but does not mean that the probability or frequency of damage has increased. The price war and the pressure of the environment have made tariffs lower with, rising claims costs, mainly due to case law and changing legal regulations and supervisory recommendations, which are generally consumer proprietorships. The most important changes in legal acts and jurisprudence include: 1) Change in the amount of guarantee sum in MTPL - since 11 June of ) Change in qualification of remedies: compensation for the immediate family members (Civil Code, Art. 446 par. 4) - since 3rd August of 2008, and to acknowledge that the immediate family member is obliged to obtained of remedy, even if the death occurred before 3 August 2008 due to injury or health disorder (Civil Code, art. 448 in accordance with art 24 par 1). 3) Interpretation of replacement cars - Supreme Court resolution of 17 November

5 4) Interpretation of depreciation - Supreme Court s position included in the resolution of 12 April ) Interpretation of new / original parts - Supreme Court's position included in the resolution of 12 April 2012 The change of the guarantee amount was the result of the introduction of the EU Directive V (Directive 2005/14/EC of the European Parliament and of the Council of 11 May 2005 amending Council Directives 72/166/EEC, 84/5/EEC, 88/357/EEC and 90/232/EEC and Directive 2000/26/EC of the European Parliament and of the Council relating to insurance against civil liability in respect of the use of motor vehicles). However, the enormous change in the coverage of injury insurance was related to the approach to remedy included in the Civil Code in 2008, which provided: a) the right to pay to the closest family members. The introduction of this amendment expanded the catalogue of persons entitled to remedy without limitation of amount of remedy. To obtain the remedy it was only sufficient to justify that the claimant was a member of the immediate family of the victim. b) the possibility of claiming even if the death occurred before 3 August of 2008 due to injury or health disorder (Statement of the Supreme Court in Resolution of October 22, 2010, sygn. akt III CZP 76/10, LEX nr ). For insurance companies, this means that for up to 20 years after the occurrence of a motor accident, the closest family can claim as a remedy. From the financial point of view, the insurer is obliged to create higher reserves for the risks (so-called IBNR). c) The other interpretation of Supreme Court concerning claims was related to the claim process of property damage: a) the insurer should cover the costs of hiring a replacement car in MPL. (Resolution of the Supreme Court, III CZP 05/11 November 17, 2011, ) affecting the increase of liquidation costs b) in the case of a motor vehicle damage, the compensation should be based on the price of new parts without depreciation deductions. (Resolution of the Supreme Court, April 12, 2012) c) using original parts or spare parts for car repair (in the resolution of 12 April 2012) The current practice of insurance companies was heavily based on the use of spare parts which prices were definitely much lower. Implementation of the above statements obliged insurers not only to verify the methods and valuation of damage within MTPL cover but also the shape of the product itself (casco of course). In addition to the above interpretations and changes in the case law, there was an introduction of some guidelines and recommendations concerning the claim process issued by the regulator, such as: Guidelines for Motor Insurance Claims (April the 1 st, 2015) Recommendations for product management system (entry into force July the 1 st, 2016) - Recommendation 23 on how to deal with damage, Recommendation on the process of determining and paying remedy for non-pecuniary damage under MTPL cover (entry into force on December 31, 2016). Entry into force of the Guidelines concerning claim process has caused a lot of controversy due to the cost of their implementation. The cost of introducing the guidelines was estimated at 20 M PLN (~5 M EUR) for each 1% market share, which amounted to 1.5bn PLN (~350 M EUR) for the whole market. The introduction of guidelines for a single insurance company would have meant an increase in damage compensation costs between 17 to 23% ( 369

6 The most important change was related to the rule of full compensation in MTPL cover insurance - it doesn t matter which method of claim settlement was chosen by the customer - workshop or cost estimate, the insurer is obliged to pay the injured economically justified value of new parts and materials including VAT. In addition, the interpretation of non-depreciation of parts in relation to all damaged parts in the vehicle and the approach to financing the cost of hiring the replacement car were upheld. It was very clear indicated in the guidelines that no matter what type of claim occurred (total or partial), it is absolutely necessary to apply the same criteria in claim process to calculate compensation. Did the introduction of the guidelines really lead to increase costs of insurance companies as intended? After their one year of operation, it seems that the new regulations have been less affected than originally planned, on the basis of the first data. It is estimated that on average it was an impact of about 10-14% on the total costs in claim process. The value of these costs varies depending on the insurance company and practices used during claim process and the construction of the portfolio. For the insurers, with the portfolio of older vehicles mainly based on cost estimates claim process, the impact of the guidelines implementation was certainly greater. The direction of the latest recommendation concerning remedy (ensuring predictability in the process of determining and paying remedy for non-pecuniary damage) seems to be correct. Changes to the law that came into force in 2008 (described earlier) have led to an increase in the volume of remedies without standardizing any rules in this area. Remedies in practice are very diverse and accordingly the amounts awarded are also very different. For the whole situation is not without significance of Smolensk casus (catastrophe of polish government airplane with the president on the plane) with remedies of 250 thousand PLN (62,5 thous. EUR for each death). All presented changes in the insurance market mean additional costs to insurance companies, resulting from the need to adapt to these changes and their implementation, as well as from higher financial burdens. In addition, it should expect further changes. The newest burden concerns VAT tax for liquidation cost. They are working in parliament over the restoration so-called Religa tax (coofinancing of car accident victims under MTPL). 3 Motor Insurance Market Over the past 13 years there has been a dynamic development of the non-life insurance market. The structure of this market has definitely changed: in 2004 the share of motor insurance (MTPL and casco damage) in non-life was 64%, to fall by 53% in The growth has been observed in property insurance and other such as TPL (eg. in private life, professional) and finance insurance. 370

7 Figure 1: Product share in non-life insurance in (Poland) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 12% 12% 14% 15% 15% 16% 17% 16% 16% 18% 20% 18% 14% 19% 18% 18% 17% 17% 18% 19% 19% 20% 21% 21% 21% 18% 34% 36% 36% 35% 35% 35% 34% 35% 35% 33% 31% 32% 39% 30% 28% 26% 27% 26% 24% 24% 23% 22% 21% 20% 21% 22% Casco MTPL Personal Accident Property Assistance Others Declining share of motor insurance in total premiums demonstrates the maturity of the market and means the increase in wealth of the society, improving insurance awareness and the demand for insurance other than just connected with the cars. Figure 2: GWP in non-life insurance in (Poland) GWP in B PLN Casco MTPL Personal Accident Property Assistance Others Declining share of GWP in MTPL and casco doesn t mean the decrease of premium collected. Nonlife insurance market in the last 13 years has developed annually average by 6,3% with the total premium in 2016 over 30 B PLN. Average annual growth rate of MTPL was at 7,4%, while for casco only 3,3%. Increase of GWP in non-life insurance doesn t correspond with profitability. Loss Ratio varies in the range of 61-65% (73% in 2010 was the effect of flood and catastrophic risks) in the last 13 years. Over the years there is a falling administrative cost (UW Ratio) what is positive occurrence. Spoiling 371

8 the view of non-life insurance market is rising acquisition cost. The acquisition Expense Ratio has increased by 11 pp over the last 13 years. Figure 3: Profitability of non-life insurance in (Poland) % % 80.00% 60.00% Total non-life 20% 21% 17% 18% 18% 14% 14% 15% 18% 19% 16% 21% 15% 23% 14% 14% 23% 23% 12% 24% 12% 12% 12% 26% 27% 25% % 20.00% 65% 70% 57% 61% 61% 68% 73% 64% 64% 60% 62% 63% 64% % LR % Aqu Exp. Ratio % UW Ratio % GWP (in thous. PLN) 0 Analysis of the technical result allows to observe a 5-6 year cycles (see Figure 4). The loss on the level 1,25 B PLN in 2010 was associated with floods, torrential rains and landslides. Figure 4: Technical Results in non-life in (in thous. PLN) Technical Results Improving profitability in the next years made severe pressure on the price, especially in motor insurance ( ), and then in property insurance ( ). 372

9 What, therefore, has the greatest impact on the profitability of non-life insurance? Over the years without natural disasters, it is undoubtedly MTPL (share in the total GWP is over 30%). Looking at the profitability of MTPL, it turns out that this insurance has never been profitable. Figure 5: Profitability of MTPL insurance in (Poland) % % % 80.00% MTPL 24% 24% 20% 8% 8% 9% 19% 26% 12% 12% 21% 17% 12% 14% 19% 17% 14% 15% 14% 14% 14% 16% 15% 18% 15% 16% % % 79% 73% 72% 80% 79% 88% 89% 81% 83% 82% 89% 91% 89% % % LR % Aqu Exp. Ratio % UW Ratio % GWP (in thous. PLN) 0 Combined Ratio was always over 100%. Due to the price war in Combined Ratio oscillated around at the level of 120%. The total loss in 2015 and 2016 was annually over 1,1 B PLN (~260 M EUR). What is the reason for this decrease in profitability in MTPL? Decreasing administrative costs are replaced by increasing acquisition costs (mainly by higher and higher commission paid for agents and multiagents). There is no doubt that the huge problem in MTPL is the growing loss ratio, which has risen in the last 13 years by 15 pp. Figure 6: No of policies in MTPL in M psc. in MTPL Policies (M psc.) -3% 7% 6% 6% 3% 3% 5% 2% 0% 1% 13% 13% 373

10 The rising LR is the result of 3 main factors: a) the falling average premium collected for the policy (see Figure 7). In 2015, for the some segments of the vehicle, in the case of a driver without any claims, the premium for the insurance could be even of 250 PLN (~60 EUR) b) claims inflation the average claim in property remains relatively in the same level; yearly body injury (BI) claims are growing disproportionately, especially in the area of non-pecuniary damages c) law regulation and judge statements causing greater burden of compensation Figure 7: Average Premium in MTPL in PLN in MTPL Avg Premium (pln) 8% -6% 1% 7% -2% 2% 9% 3% -6% -6% -16% 34% The growth of MTPL policies is connected with rising car import, especially elder ones. In 2016 the average premium gain the higher lever. It is expected that the premium in 2017 will be on average higher by another PLN. As a rule of casco insurance are profitable. The lack of profitability is evidently the result of the premium ratio - too low for the costs of claim settlements. The average premium earned in the casco insurance was in 2015 the lowest in the last 12 years and 200 PLN lower than in

11 Figure 8: Profitability of casco insurance in (Poland) % Casco 11% % 16% 14% 11% 11% 14% 13% 8% 14% 80.00% 16% 15% 18% 19% 18% 17% 18% 8% 7% 8% 18% 19% 20% 60.00% 40.00% 80% 72% 70% 74% 67% 65% 63% 68% 61% 65% 68% 20.00% 7% 7% 21% 22% 75% 72% % LR % Aqu Exp. Ratio % UW Ratio % GWP (in thous. PLN) 0 The lack of profitability is evidently the result of the premium ratio - too low for the costs of claim settlements. The average premium earned in the casco insurance was in 2015 the lowest in the last 13 years and 200 PLN lower than in With severe falling premium insurance while increasing market regulations, maintaining profitability is a huge challenge for insurance companies. Figure 9: No of policies in Casco in M psc. in Casco Policies (M psc.) 2% 0% 8% 8% 7% 10% -5% -1% 1% 3% 26% -6% Falling casco premium did not contribute to the increased penetration of these insurances in the nonlife portfolio. This is due to the influx of cars imported from abroad, whose average age is about 12 years. It must be emphasized that the casco offer practically in every insurance company is limited to vehicles that are not over 15 years old. 375

12 Figure 10: Average Premium in Casco in PLN in Casco Avg Premium (pln) -5% 0% 3% 2% -12% -2% 16% -1% -6% -4% -18% 28% Limited tendency to spend money for insurance by society with increasing premium both in MPTL and in casco, has led to a decrease the number of casco policies (as a voluntary insurance). The figures for 2016 show a very strong increase in GWP. It seems that the insurers have been frightened of the technical results they have recorded in There is no doubt that MTPL and casco prices have gone up. The first increase of premium started in the fourth quarter of 2015, which means that the last seven quarters are actually the period of premium increases, mainly in MTPL. However, it should not be expected a significant improvement in profitability of insurance companies in The bottom of lowest prices was recorded in the first 2 quarters of Then the initial increase of premium was the market research and customer behaviour, and only in the beginning of 2016 the increase of premium became significant. This means that the impact on the final portfolio and the level of premium earned in 2016 have the policies concluded with very low premium. The effect of increases in earned premiums and in technical results should be visible till the end of Summary Motor profitability significantly deteriorated in 2014, and the deterioration continued in 2015 with slight improvement in The main reasons for such deterioration were: 1) Loss on the insurance market, in particular with regard to MTPL, mainly due to the inadequacy of the premiums that insurance companies charge from customers. 2) The inadequacy of contributions is due to two main factors: very low premiums resulting from the price war between insurance companies and rising costs, especially in terms of the amount of compensation paid and benefits. 3) The impact to increase the costs relating to the claims and compensations are mainly due to changes in the regulations, recommendations of supervision and court rulings. 4) There is a inflation cost, mainly in the field of BI The currently rising premiums in motor insurance may not be sufficient due to the planned changes by the government, such as the introduction of a Religa bis tax (co-funding for the treatment of road victims) or paying compensation in car damage only on the invoice system (no cash). 376

13 The above-mentioned actions on the adequacy of premium have their backing from rising costs of claim settlement. The changes in law and judicial decisions over the last few years have always been pro-consumer. All activities should bring a change in the mentality of both the public and the insurers themselves that rising costs must entail an increase in premiums. The pressure of the environment (customer) to buy insurance (especially MTPL) at the lowest price, and at the same time the willing of insurance companies to gain wider and wider market share will lead to price war. As long as the thinking of insurance companies and insurance intermediaries does not start to build on profitability rather than volume of the premium (GWP), then the debate about premium adequacy can only end in discussion. References Act on mandatory insurance, Insurance Guarantee Fund and the Polish Motor Insurers Bureau, May 22, 2003, (Dz.U.; No: 2003/124/1152; Publication date: 16/07/2003 Civil Code, April 23, 1964, Dz.U poz. 121 Directive 2000/26/EC of the European Parliament and of the Council relating to insurance against civil liability in respect of the use of motor vehicles Directive 2005/14/EC of the European Parliament and of the Council of 11 May 2005 amending Council Directives 72/166/EEC, 84/5/EEC, 88/357/EEC and 90/232/EEC Global Insurance Customer Survey Ernst & Young Handschke J., Monkiewicz J. 2010, Ubezpieczenia. Podręcznik akademicki., Poltext, Warsaw Insurance and Reinsurance Activity Act, September 11, 2015, Dz.U poz Jakubiak A. 2012, Stanowisko UKNF w sprawie adekwatności składek ubezpieczeniowych skierowane do zakładów ubezpieczeń, Warsaw, is available at: 12_32027.pdf Jakubiak A. 2015, List otwarty do krajowych zakładów ubezpieczeń prowadzących działalność w grupie 3 i 10 Działu II, Warsaw, is available at: 15_tcm pdf Samuelson W. F., Marks S. G. 2009, Ekonomia menedżerska, PWE, Warsaw Supreme Court resolution in resolution of 22 October 2010 (sygn. akt III CZP 76/10, LEX nr ) Supreme Court resolution of 17 November 2011(III CZP 05/11) Supreme Court s position included in the resolution of 12 April 2012 Wytyczne będą kosztować 1,5 mld zł, Dziennik Ubezpieczeniowy, is available at: 377