Published Date: 15 October 2009

Speech by Mr Low Kowk Mun, Executive Director (Insurance Supervision Department), Monetary Authority of Singapore, Asian Motor Insurance and Claims Management Conference, 15 October 2009

Good morning ladies and gentlemen.

2   I would like to thank Asia Insurance Review and the General Insurance Association of Singapore for organising this conference and for inviting me to address you this morning. 

3   Motor insurance is a significant class of insurance business in most countries.  In Singapore, it accounts for about a third of total premiums in the domestic insurance industry.  As in most countries, it is a mandatory requirement for drivers to purchase motor insurance before they are allowed to operate a motor vehicle.  At a minimum, the motorist has to have insurance cover for his liability to third parties who may be injured in an accident as a result of his careless driving or poor judgment.  The insurance cover is to ensure that the aggrieved third party will be compensated financially for the injuries suffered even if the motorist does not have the personal financial resources to do so.  Compensation for third party bodily injury can be significant, well beyond the means of the ordinary motorist to bear.  I understand that in Singapore, the highest compensation amount that has been awarded was almost S$2 million. 

4   Motor insurance therefore serves an important social purpose and is perhaps the single class of general insurance business that generates the most interest amongst the residents in any country.  Any rise in motor insurance premium rates will affect the lives of a large proportion of the population.  In Singapore, there are more than 800,000 motor vehicles registered.  This means that one in every three adults in Singapore is probably a motor insurance policyholder.  You can therefore imagine the amount of feedback we get whenever motor insurance premium rates rise significantly.  I would assume the situation to be similar in other countries.  This is perhaps one of the reasons why in some markets, motor insurance continues to be subject to tariff rates so that premiums can remain affordable to the vast majority.

5   Given the significance of motor insurance business in the insurance industry, as the insurance regulator, we take a keen interest in how insurers manage their motor insurance portfolio.  We would want insurers to have in place sound risk management policies and procedures, especially with regards to pricing and claims management.  In addition, insurers should ensure that their policyholders are treated fairly and legitimate claims are paid promptly.

6   Given its large market potential, there is no shortage of insurers willing to compete for motor insurance business.  However, it would be wrong for insurers to assume that they can compete successfully by simply pricing their policies lower than their competitors.  Insurers should take into account the different characteristics of the motorists they are insuring in their portfolio.  That is why we have been encouraging insurers in Singapore to develop more risk sensitive underwriting and pricing models that take into account pertinent information, such as the driver’s characteristics and the type of car he is driving.  I am told that some even consider the colour of the car in their pricing models.  Insurers should develop their own pricing models using data from their own claims experience rather than just matching their competitors’ prices because the risk profile of their motor portfolios and cost structures could be very different.  Ultimately, individual insurers should exercise underwriting and pricing discipline instead of pricing for market share.

7   Motor insurance is a highly commoditised product as key features do not vary much across different providers.  Therefore, insurers have to consider innovative ways to manage their costs in order to differentiate themselves.  Besides managing distribution costs with more efficient distribution strategies, insurers also have to develop strong claims management systems.  As claims form the largest cost component in motor insurance, it is critical for insurers to have robust claims management processes to keep such costs under control.  In addition, in many countries including Singapore, motor insurance claims are most susceptible to inflation and fraud.  For example, in an accident, unless it is a straightforward case of a rear-end collision, the question of liability can often be subject to disputes.   Such disputes can be protracted and some may even have to be settled in court, resulting in increased costs to the insurer that has to pay the claim eventually.

8   The motor insurance industry in Singapore has been plagued by increasing claims costs for many years.  It has adopted various measures to try and keep claims costs under control with varying degrees of success.  For example, many companies have adopted a system of authorised workshops while some have also introduced a price list for spare parts to be used by the authorised workshops.  The most recent initiative was the introduction of a new motor claims framework that will require motorists to report any accident to their respective insurers within 24 hours of the accident.  The objective is to allow the insurer the opportunity to inspect the damaged vehicle before it is repaired so as to minimise the possibility of an inflated claim.  This should in turn facilitate faster claims settlement.

9   Motor insurance fraud appears to be an issue that confronts insurers in many countries.  This could be because of the many different parties involved in the claims process, making it more difficult for the insurer to minimise the risk of fraud.  First, there is the motorist himself and the third party who may be claiming against the motorist’s insurer.  Then there are the workshops handling the repairs to the damaged vehicle, doctors attending to any injured party, and lawyers representing claimants against the insurer.  While it would be difficult for anyone acting singly to inflate a claim, it is not difficult for the claimant to collude with another party to inflate the claim or file a false claim.  Once there is collusion, it becomes difficult for the insurer to prove that a claim is not legitimate without strong documentary evidence.  It is often not easy to obtain such documentary proof as the insurer is not present when the accident occurred or when the damaged vehicle is repaired or the injured party is being treated.  Therefore, most have little choice but to negotiate a settlement as far as reasonably possible.

10   In Singapore, the media has been highlighting the apparent increase in occurrences of motor fraud.  For example, there were media reports about possible staged accidents and representatives of workshops turning up at the accident scene very soon after the accident.  There was also a highly publicised case where a motorist named a phantom witness to corroborate his account of the accident in order to strengthen his claim against an insurer.  When the case went to court, the motorist withdrew his case as the witness could not be produced.  Some motorists have also written to the media about significant claims being made against them for what were apparently minor fender benders.  Motor fraud is not unique to Singapore.  In September, the media reported that the police in Seoul had successfully uncovered a scam in which juveniles staged motor accidents in order to exact compensation from insurance companies.  Three doctors were also charged for involvement in the scam.

11   As a result of the significant increase in claims costs in 2008, resulting in record losses for the motor insurance industry, insurers in Singapore have raised motor insurance premiums significantly.  Faced with this sharp rise in motor insurance premiums, various interested parties have raised a number of suggestions, including the possibility of adopting a no-fault regime and a call on the government to introduce a tariff system.  There was even a suggestion that the government should mandate that all motorists install recording devices in their vehicles to capture any accidents on film and hence minimise disputes between the parties involved.  I note that a number of expert speakers will be touching on various measures later in the seminar.  It would be helpful for us to learn from the experiences of other countries and evaluate if there are useful measures we can adopt.  Of course, the motoring culture and circumstances are different in each country and what works in one may not be suitable for another.

12   While it is important for insurers to have strong controls in place to keep claims costs and distribution expenses in check, the motoring public also has an important role to play to ensure that insurance premiums remain affordable.  As the concept of insurance is based on the pooling of risks, all policyholders within the same pool will have to share in the losses of the pool.  Should the pool pay out more claims than the premiums it collects, the insurer will have to raise premium rates in order to cover the losses and pay future claims.  As such, all policyholders will have to shoulder the burden of higher premiums, although in a non-tariff market, those that have made more claims will have to shoulder a heavier burden.  Therefore, it is in the interest of every motorist to act responsibly when filing insurance claims.  In the event of an accident, the motorist should take photographs of the accident vehicles that can be used as evidence for the insurer when processing claims made against it so as to minimise unnecessary and costly disputes.  At the same time, insurers should also act responsibly and fairly, and process claims promptly.  This will provide the right incentives for motorists to cooperate with their insurer in the settlement of their claims.

13   Although motor insurance is a relatively simple insurance product, managing the claims costs involves complex issues and this poses a significant challenge to insurers.  Most of you would agree that there are no easy solutions.  Hopefully, through your deliberations at this conference, useful ideas can be generated to help the process along.  On that note, I wish you a fruitful and enjoyable conference.