Motor Insurance in Singapore
2006
Paper presented by Tan Kin Lian, Chief Executive Officer, NTUC Income

1. INTRODUCTION

Motor insurance is compulsory in Singapore.

It is the largest class of general insurance business, contributing to about one-third of the total premium.
The motor insurance premium amounts to S$700 million (US$400 million). More than 30 insurers are active in motor insurance.

We would like to share with you the development of motor insurance in Singapore, as well as NTUC Income's experience in managing the business.

2.    Market development

2.1   Rating

Motor insurance business is competitive. Premium rates are kept down through the intense competition. Each insurer is free to set its own premium rates. It is important for an insurer to have a good rating structure, and to charge the correct premium rate according to the characteristics of the risk insured.

Prior to 1994, insurers follow a tariff set by the industry. This tariff is largely based on a percentage of the sum insured of the vehicle, with some loading for a few major risk factors.

The General Insurance Association of Singapore commissioned a study on the rating system based on a points rating system. The points were computed based on the industry-wide experience of the claim frequency and severity according to various risk factors, such as the characteristics of the driver and the vehicle.

2.2 Distribution

A large proportion of the motor insurance are distributed by intermediaries, such as motor car dealers and general insurance agents.  Some insurers and intermediaries has tie-up with the car distributors to package the insurance in the car price.  They are able to monopolise the new car market.

A small proportion of the business is handled directly. We expect the share of direct business to increase in the near future, as motor insurance is compulsory and is quite well understood by the consumers.  As Singapore is a small country with good communication infrastructure, it is also easy for the consumer to buy insurance directly, through the telephone, internet or visit to the branch.

2.3 Competition

Competition is keen for motor insurance, with over 30 insurers competing to insure 700,000 vehicles.

In the past 2 years, more insurers are trying to increase their market share through cutting their rates and tying up with car distributors to lock in the new car insurance.

The motor insurance market is quite price sensitive.  Many people shop around for the best rates.  Some insurers are willing to match the lower premium offered by other insurers, despite having a higher cost structure.

3.  Managing motor business

3.1 Product

The product features offered by various insurers are largely similar.  They cover own damage, third party damage and third party injury.  The minimum cover is third party liability cover for injury and death, as stipulated by the law.

There may be some slight variation in the cover, e.g. different amount of excess, unnamed driver.  However, these variations alone are not significant enough to determine buying decision.

Another important part of the product feature is the claim practices.  Some cover allows motorists to send their accident vehicles to their own repair workshops, while other some restrict the choice of workshops to an authorised workshop panel. The premium rates are usually higher if they allow motorist to choose their own workshops.

3.2 Price

The price is one of the most important factors to attract motorist to take up the insurance with the company.
Motor insurance is very price sensitive.  Some motorists go around shopping for the lowest rate.   These group of motorists are not influenced by the little brand differences between the insurance companies.

3.3   Distribution


Majority of the motor insurance are sold through intermediaries.  Commission rate for intermediaries is capped at 15%.  Some insurers also allow motorist to buy direct.  As the average Singaporean becomes more well-informed and educated, the role of the intermediaries is envisaged to be reduced and buying direct from insurers will become the norm.

3.4   Cost control

In order to price the premium rate competitively, the insurer has to be efficient in managing their cost as well as the claims. The expense ratio for the industry is about 30%, half of which are commission expense.

4.  Customer Service

4.1 CUSTOMER service

Like any line of business, customer service is an important part of the value proposition. Customers expect hassle free process, and insurers must be able to handle customers' request promptly and efficiently. Insurers must be able to meet customers' increasing expectations.

4.2   Claim service

Each year, about 20% of the motor policyholders would have made a claim. They can choose to claim against their own insurer or insurer of the third party who was at fault for the accident. The claim occurrence rate has increased over the 6 years. It has increased from about 16% in 1999 to the current 20%. This coincides with the discontinuance of the Traffic Police's involving in non-injury accidents in September 1999. Each month there are about 2,500 own damage claim and 3,500 third party claim.

5.  Claim Management

5.1 Pro-active management

Different insurers adopt different claims strategies.  Most insurers work on a passive mode i.e. they allow motorist to go to any workshops to repair their accident cars, and reimburse the bill. For third party damage claims, the third party workshops will handle the repairs for the motorists and submit the claims many months later. As the insurer is not involved in checking and verifying that the damage was caused in the accident, many of the damage may be aggravated and some of the repairs may be for old damage.

This give rise to the problem of inflated and fraudulent claim, which increase the claim cost. In turn, all motorists have to pay a higher premium as the claim cost keep spiraling upwards.

5.2 Injury claim

For third party injury claims, the third party lawyers may submit the claim on behalf of the injured parties many months or even years after the accident.   Most insurers take a passive approach and wait for the third party lawyers to submit the claims.   This result in indigent victims suffering hardships because they are not paid early.   Furthermore, legal costs pushed up the claim cost by a further 50%.

6.    Key challenges

6.1 Intensified competition

Insurers undercut each other to offer low premium rates. This happened 5 years ago where many insurers suffer huge loss from the motor business. One insurer even went into liquidation from the loss. The motor insurers increase the premium rates by 35% to stem the loss. The industry returned to profit in the last 2 years, and many insurers began to be active in the business again.

This is an unhealthy situation for the industry, if the insurers do not look at their own cost structure and claim experience to price the premium.

6.2    Inflated and fraudulent claims

Although the situation has improved over the past 3 years (due to tough measures implemented by NTUC Income and some insurers), the problem cannot be eradicate completely.

There are syndicates who look for opportunities to make fraudulent claim by staging accident, colliding with motorist etc. We have to be diligent and monitor the claim trends closely.

6.3     High repair cost at distributor workshops.

The repair cost charged by distributor workshops is usually 2 to 3 times higher as compared to other workshops. There were no transparency in the part prices and the repairs charged by the distributor workshops.
This resulted in high claim cost which leads to higher premiums borne by the motorists.

7.   Industry Regulations

7.1 REGULATIONS

The Motor Vehicles (Third-Party Risks & Compensation) Act make it compulsory for all motorist to insure against third-party risks arising out of the use of motor vehicles, in terms of compensation in respect of death or bodily injury arising out of the use of motor vehicles.

Monetary Authority of Singapore (MAS) supervises the insurance industry, including motor insurance.  It has as its primary objective the protection of the policyholders' interests.

Insurers have to submit regular returns to them with respect to the financial accounts, insurance, claims and reserves statistics.  MAS has the right to inspect the books of the insurance company.  It works closely with the General Insurance Association of Singapore to promote the adoption of best practices by the industry.

7.2   Motor Insurers' Bureau (MIB)

The Motor Vehicle (Third Party Risks and Compensation Act) affords protection in the instance of an injury or a fatality. However, the MIB is concerned with situations where compensation required for the victims of uninsured drivers and the victims of untraced drivers.

The bureau has also enter into a special agreement with Malaysian registered Insurers for Malaysian registered vehicles to be covered under MIB when these vehicles are in Singapore.

7.3 GENERAL Insurance Association of Singpaore (GIA).

This is a trade association. GIA encompasses all non-life insurance companies transacting business in Singapore. GIA facilitates and works to make all aspects of insurance easier and more effective for consumers, agents and insurance companies. GIA has no regulatory authority.

It draws up and promotes market agreement between members. The market agreements are mainly administrative in nature. They provide for the smooth running of the business, improve distribution and efficiency.

NTUC Income is a member of GIA.

8.   NTUC Income's experience in motor insurance.

NTUC Income is the largest motor insurer, insuring 37% of the vehicles. We have been the leading motor insurer for more than 10 years.

NTUC Income is the leading motor insurer with 37% market share. Our rates are 5% to 10% lower than major competitors.

8.1 Rating

NTUC Income adopted the rating system in 1994.We were the first insurer to adopt the point system.  We used our large portfolio of insured motor vehicles to arrive at a points rating system based on our own claim experience. Our experience has been positive.  Many insurers follow suit after that.

NTUC Income's premium rate is 5% to 10% than major competitors.  We are able to offer competitive premium rates due to better claim management and lower expenses.

Our premium rates are reviewed every six months. We determine our premium rates based on an actuarial analysis of the claims submitted during the previous 24 months.  The claims are analysed according to the risk factors, such as the characteristics of the vehicle and the owner, and the type of coverage.

We used this analysis of the claims to work out the points to determine the premium rates. We may adjust the points to some extent, to ensure that our premium rates are competitive.

On the whole, our strategy is to get correct premium rates based on our claim experience, rather than to follow the rates that are charged by our competitors.

8.2 Distribution

In NTUC Income, we are active using intermediaries and the direct channel.  About 30% of motorist buy direct from us.  They come to our branches or transact over internet or phone.  They enjoy a small discount when they buy direct.  Most of the renewals are handled by the office.

8.3   Cost control

NTUC Income has one of the lowest expense ratio, which is 8% to 10% below the industry's. Our low expense ratio is largely due to our efficient use of Information Technology to improve our processes. Our large portfolio also gives us the economy of scales.

8.4 CUSTOMER service

In NTUC Income, we handle 20,000 motor transactions a month, such as new applications, renewals or endorsements.  Most of these are settled on the spot, within 5 to 10 minutes.

Through our customer surveys, 97% of the customers are happy with the service provided.

8.5 Claim service

In NTUC Income, we handle 600 own damage claim and 1,200 third party claim every month.  We aim to provide prompt and fair claim settlement to our claimants.  95% of the claims are settled within 14 days.  This is a quite an achievement, as many claimant dispute on the liability as they think that the accident is cause by the other party.

Through our surveys, more than 90% of the claimants are happy with the service as well as the quality of repair.

In NTUC Income, we recognise the need for a pro-active claim management. Our strategy includes:

- Tender of repair

- Pro-active handling of injury claim

- Direct settlement of third party claim

- Motor repair cost software - MRCS

- Work closely with lawyer to handle legal cases.

We estimate that the total savings from the claim management measures could account for 5% to 10% of the premium.

8.6   Tender of repair

We handle an average of 60 repairs a day, comprising mainly of vehicles insured by us.

The claimant reports the claim at an independent assessment center and leaves the vehicle for us to arrange the repair. After the damages are assessed by the center, we invite our quality workshop to tender for the repair.

The tender is usually awarded to the lowest tender. We are able to reduce the repair cost by an average of 20 percent using this method, compared to the traditional method of negotiating the repair cost with the workshop selected by the owner.

Each year, we settled about $42 million in injury claims, of which about 35% is represented by legal fees. The injured person has to wait for about 12 months to have the claim finally settled.

We now adopt a pro-active approach to handle these claims. We approach the injured person immediately, if we are aware that they are injured. We offer advance payments to help them to meet their medical expenses and loss of income.

We also arrange for them to get independent advice on their general damages, i.e. to cover permanent injury.
Our aim is to have the claim settled promptly and fairly, and to avoid the legal cost and unnecessary expenses.

This approach appears to be working well. We estimate a potential saving of $4 million.

8.7   Direct settlement of third party claim

The third party claimant usually appoints his workshop to submit the claim against us, in the case where our policyholder is responsible for causing the accident. In the past, about 50% of the claims are submitted through a lawyer appointed by the workshop. The claim is increased by an average of 30%, representing the legal fees.

We approached these workshops and work out an arrangement for them to submit the claim directly to us, instead of going through a lawyer.  The workshop benefits from easier and faster settlement of the claim.

Less than 20% of our claims are now submitted through a lawyer. The rest of the third party claims are now submitted directly to us. The estimated saving in legal fees is $3 million a year.

8.8 MOTOR Repair Cost Software - MRCS

We recently introduced a new system (MRCS) to estimate the repair cost for motor vehicles.

We have recently purchase a database system from a research organisation in the United Kingdom. It comprises of computer software and a database of parts prices. We build our own database of part prices provided by our quality workshops, based on recent repairs carried out.  We have now collected reliable prices for 30,000 parts prices.

Our surveyor identifies the damages to the vehicle and enters the parts into the software. The software estimates the cost of repair. Our surveyor finds the software to be user friendly and flexible.

This help us save over $1 million a year from the reduce reliance on external surveyors.

8.9  Managing litigation

In the past, we adopted a passive approach and depended on our lawyer to handle the legal case in court. We paid about $16 million a year in legal fees (for both parties) and court charges.

The third party lawyers were submitting more claims through the court, as they can claim their fees from us on the settlement of the claim. They are encouraging the workshop to use their service, as the fee is charged to the insurer.

We discovered a court process called "offer to settle". If we submit a reasonable offer to settle, and the final award is less than our offer, a large proportion of the legal fees and court charges will have to be borne the third party.

We are now getting a higher proportion of the legal cases settled at an early stage. We expect to save about $6 million a year in legal expenses.

Over the last few years NTUC Income have successfully countered this by convincing vehicle owners to agree for the repairs to be done at non-distributor workshop by giving them quality repairs and taking agreeing to take over the warranty should the distributor void the warranty.

9.  Experience

Singapore Market - Motor Insurance

*estimated

NTUC Income - Motor Insurance

*estimated

We achieved a significant growth in our market share during the past 5 years. This growth was achieved with a satisfactory level of operating profit, i.e. underwriting profit plus investment income.

We have made adequate provision for our outstanding claims, which represent about 110% of the premium (as compared to 105% for the Top 5 insurers). We have a higher speed of settlement of claim, so our provision is probably higher than required.

10. Conclusion

Motor insurance business is highly competitive in Singapore. The vehicle population grew at about 3% every year, controlled by the government. This meant that the business volume will continue to grow steadily.

The key driving force is the premium rate.  Many insurers undercut each other to gain market share. Some insurers adopt the distributor tie-up strategy to control the new car insurance segment.

To manage the business successfully, we need to keep the cost low and manage the claims well. NTUC Income has been the leading motor insurer for the past 10 years.  Our business model has allowed us to achieve good results.