THE Insurance and Pensions Commission (IPEC) has advised Government against setting up the Road Accident Fund, warning doing so will erode $71 million of short-term insurers’ income from third party business and cause sudden collapse of at least eight companies. The road accident fund RAF was conceived by the Ministry of Transport and Infrastructure Development as a mechanism to pool financial resources to be used in the event of major road accidents; amid concerns private third part insurance (TPI) companies do not do much about it, leaving the burden to the Government.
But in its response, following request by Government for the regulator’s perspective regarding the proposed fund, IPEC confirmed the insurers’ fears, saying apart from eroding half their incomes; the RAF would see four insurers immediately ceasing operations. As such, IPEC said Government should not set up the RAF. The RAF would mean insurers would have to stop third party business. In effect, a total of eight out of 20 TPI insurance companies could immediately collapse if Government set up the RAF, as four other insurers derive 60 percent of their gross premium written from third part cover.
IPEC’s advice follows the submission to Government by the Insurance Council of Zimbabwe recently, which lobbied against the establishment of the road fund, but consolidation and refining of the TPI system, as the RAF would wipe out nearly half the insurers income. In Zimbabwe, third part insurance is mandatory in terms of the Road Traffic Act, administered by the Ministry of Transport and Infrastructure Development, which proposed that the RAF be set up. TPI provides cover where a licensed driver is involved in an accident where the driver is at fault and the accident results in death or bodily injury to any person, destruction or damage to property, resulting from the motor vehicle or the trailer it will be towing.
“Third party motor insurance, which is predominantly structured around the RTA, recorded total premiums amounting to $71,38 million for the period May 1, 2016 to April 30, 2017. Premium generated from third party policies contributed 32,8 percent of gross premium while 42,86 percent of total premium is attributable to all types of motor insurance, including TPI,” IPEC said. Short-term insurers recorded gross premium written of $271 million in the second quarter of 2017, according to the latest official report. According to the submission by IPEC, obtained from Government sources, funding challenges, cost of technical expertise, governance issues, RAF monopoly and duplication of roles are among the reasons why Government should not set up the RAF.
“It is clear that four insurance companies would have to close down immediately (Champions, Clarion, Regal and Sanctuary). This is because their business is predominantly TPI with gross premium written of about 100 percent. Another four will be in serious financial problems (Allied, CBZ, Hamilton and Safel) because their TPI business constitutes 60 percent of their gross premium written.”
TPI accounts for a big portion of the business of the insurance industry and loss of the TPI business following the establishment of the RAF would result in the market not enjoying economies of scale, IPEC said. The insurance regulator has therefore recommended Government should maintain the current system of short-term insurance cover where road accident victims are covered by TPI issue by private companies.
It said Zimbabwe’s insurance industry had tested models, structures and skills to ensure sustainable funding of road accident disasters under the Road Traffic Act framework. IPEC said concerns of fake cover notes, also cited for the RAF, had been resolved through the shift to issuance of electronic cover notes. Citing the various reasons, IPEC said the TPI system should remain. “IPEC prefers maintenance of the status quo, but take specific measures to improve any real or perceived shortfalls,” IPEC said.
“While short-comings have been noted in the operation of TPI, key stakeholders including the Ministry of Transport and Infrastructural Development, IPEC and the insurance industry are encouraged to explore constructive measures to address shortcomings.”
IPEC said if the RAF has to be set up, it should only cover bodily injury, funeral benefits and healthcare costs, but leave insurers to manage the damage impacted on property. IPEC also said where a similar structure has been adopted, such as in South Africa, the fund was paying more to road accident funds than what was paying out while its fuel levy to capitalise the fund increased fuel prices. Investigation of claims was taking too long. The fund is also funded from a fuel levy in Botswana, Namibia and Swaziland.