Regulation issues related to liberalizing
MTPL
Mihael Perman, PhD
1
Overview
• Brief history in Slovenia
• Some statistics.
• Recommendations by Government Actuary’s
Department (UK).
• Experience after deregulation.
• Experience in other countries.
• Other hurdles on the way to profitability.
• The role of regulators.
• Conclusions.
2
Brief history
• Prices of MTPL insurance in Slovenia were
regulated until August 1999.
• The Government determined maximum possible
price increases periodically.
• MTPL prices were by and large the same across
companies.
• From 1995 to 1999 cumulative losses were
more than a year’s total MTPL premium.
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Brief history continued
• Losses were compensated from other lines of
business (mainly fire and most notably health in
one composite company).
• The Supervisory authority insisted on correct
levels od technical provisions and hired outside
experts. Companies were underreserved.
• At political level economic arguments did not
have much effect.
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Overall statistics
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Example 1 – a pitfall
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Comment
• Usually claims are settled over a period of years.
• New premium can be used to pay claims from
older policies.
• If premium is not sufficient the problem will not
go away but fester under the surface.
• If more claims are paid than premium collected
eventually there will be a big problem.
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Real loss development
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Importance of MTPL to the industry
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Comparison of reserves by GAD
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Comment
• Most companies were underreserved-some of
them substantially.
• Most companies were “in trouble” with MTPL.
• GAD anticipated that price regulation would
force companies out of the MTPL business
unless a 40-50% price increases were allowed
thus reducing competition and availability of
cover.
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Recommendation of GAD
•
•
•
•
Remove price controls.
Reduce cost.
Introduce more risk sensitive pricing.
Encourage safety precautions like seat belts and
reward safe driving.
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Experience after deregulation
• There were no major surprises.
• The premium slowly notched upwards but there
were no sudden big increases.
• The Supervisory authority allowed a gradual
buildup of provisions in order not to weaken
companies too much.
• Over a period of several years the technical
provisions reached adequate levels. By the time
of EU entry the loss ratios were reasonable.
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Experience long after deregulation
Table 1: MTPL insurance in Slovenia in years 2007-2009
Loss ratio
(in %)
Comb. Loss ratio
(in %)
Exp. ratio
(in %)
Gross premium
written (in
EUR)
Gross claims
incurred (in
EUR)
Number of
policies
Number of
clai
ms
2007
54,80
73,97
19,17
329.924.855
182.187.187
1.641.479
70.575
2008
53,92
72,95
19,04
336.264.942
184.291.169
1.697.097
69.379
2009
57,46
77,08
19,61
322.983.306
184.559.160
1.693.240
71.164
Source: Statistical bulletins St-10, St-23, St-27 and St-53.
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Experience in other countries
• JORDAN: Companies went collectively “on
strike” and stopped selling MTPL because
of regulated pricing creating an unpleasant
situation for consumers and regulator.
• MACEDONIA: Prices are still regulated at
levels that are too low. They were lowered
during the electoral campaign due to snap
elections. Liberalization announced for
years.
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Experience continued
• KOSOVA: Liberalization announced for
years but there is fear of underpricing.
• MONTENEGRO: Regulated prices with
companies struggling to break even.
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Conclusions about regulated prices
• Political interventionism to keep consumers
happy and inflation in check is not the right way
to go. Someone has to pay anyway.
• Stability and healthy competition comes about
when the right levels of technical provisions are
established and enforced by regulators.
• Low premium to undermine competition remains
a problem which is difficult to deal with for
regulators.
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Other hurdles
• Fraud is believed to cost about 5% of total
premium worldwide. What can be done?
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Possible measures
 Establish firm control over claim
adjusters. Need to do the homework.
Fraud should not be simply factored into
pricing. Companies need to do their
homework.
Agree on a common database of fraud
cases accessible to all companies.
Use software for fraud detection and
blacklist.
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Intermediaries
• The fees of intermediaries are killing us.
What do we do?
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Possible measures
 Develop retail networks under the control
of the company.
 Careful tracking if premium is paid in
installments.
Careful tracking that intermediaries do
pass on the premium to the company.
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The competition is killing us
• Healthy competition is the best way to
establish the right levels of premium.
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Possible measures
Do not give in to pressure of the market if
you know prices are too low.
Establish good risk management and
corporate governance.
Take a long term view.
Introduce more risk based pricing.
Bring up the problem in Insurance
associations.
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Conclusions
• Companies need to do their “homework”.
• The regulator does not have the “magic
wand” that will do the work the companies
need to themselves.
• The regulator will usually not intefere in
squables between companies.
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Regulatory issues
• There is a role for regulators and
regulation in MTPL.
• There is a role for competition authorities.
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What can regulators do
Monitor the levels of technical provisions
more closely.
Strictly enforce solvency.
Licence interemediaries and aggressively
withdraw licences in cases of infringement.
Include assessments of IT systems in onsite inspections.
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What can regulation do
 More risk based capital requirements may
help.
Solvency 2 style “disclosure” can be a
powerful tool. If everyone sees poor
performance it is a deterrent.
ORSA may be onerous but can be a
powerful wake-up tool for management.
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Conclusion
There is a way to profitability. It takes good
management of companies, good market
discipline with its enforcement and right
regulation.
THANK YOU
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