Motor insurance – let the Govt take over

Many comments have been made about Consumers Association of Penang ‘s (CAP’s) proposal for a no-fault liability scheme in relation to motor vehicle accidents (MVAs), and regarding the proposed scheme by Bank Negara Malaysia (BNM). CAP wishes to set the record straight regarding its stand on the proposed BNM scheme as well as respond to the comments made.

Very little is known about the proposed scheme by BNM, but from various reports in the media, it appears that :

1. Under this scheme, payouts by insurers for claims from motor vehicle accidents will be no more than RM100,000, inclusive of hospitalisation, rehabilitation, pain and suffering, loss of income and future earnings. That means that if a person is seriously injured, suffers lifelong disability, needs rehabilitation or loses his livelihood, he will receive no more than RM100,000. If he wants more, he will have to sue the other party to the accident in court.

2. The scheme has been proposed because insurance companies say that premiums are insufficient to cover third party claims, and that they are making losses.

3. A private company or conglomerate comprising insurance companies will manage the scheme. An initial capital of RM500 million is required, and this is proposed to be raised through higher premiums or a government (ie, taxpayers) payout.

4. Consultation, including working groups, have already been carried out with insurers – whereas the public, consumer organisations and other stakeholders have all been left out. Only now, the central bank is planning to consult everyone else.

CAP is alarmed that BNM has thought it appropriate to support a scheme such as this that will adversely affect millions of road users in this country, in response to the lobbying of the insurance industry.

The industry claims there is an underwriting deficit. As far as the public is concerned, no evidence has been produced in support of this contention. If what the industry claims is true, then the solution is not in appointing insurers, who have proved themselves incapable of delivering benefits to victims of accidents efficiently and equitably, to manage such a scheme.

If insuring TPBID claims is a burden to insurers, it makes it even clearer that the reason they have made such a proposal is to reduce their ‘losses’ and increase profits. That should never be the reason for a change of policy.

It is the responsibility of the government to step in and set up a system which would deliver fair and just relief to all persons affected by MVAs, quickly, adequately, efficiently and without great cost. We have to look at other solutions, which would ensure social justice to all road accident victims.

It is irresponsible of the insurance companies to propose motorists pay a higher premium for a scheme that will put them in a far worse position that they are in now. Most motorists cannot afford to file cases in court, and many will never be able to pay the damages sought by persons seriously injured, especially those who are unemployed or without full time jobs.

Consultations should have been carried out at the outset with all stakeholders, before such a scheme was even considered, and not merely with the party who will profit the most ie, insurers.

CAP is of the opinion that the current system is not working and accident victims are not getting a fair deal. Currently, under the fault based system, claims for compensation for personal injury or any other loss occasioned by motor vehicle accidents are made by instituting proceedings in court. The courts apply principles of common law negligence in determining fault and compensation. Compensation is paid out by insurance companies out of funds derived from premiums paid under compulsory third party risks insurance policies.

In fault-based litigation, not every person injured in an accident receives compensation. Furthermore, regardless of the severity of injuries or extent of loss, claimants usually have to wait for a considerable period of time and spend substantial amounts of money before a final determination of their rights and award of compensation. Such a delay may mean that many are unable to speedily return to gainful employment.

Lawyers take a big chunk of the damages paid by insurance companies. CAP has received complaints of lawyers taking between 25-30% of the amount paid out.

CAP has for years been calling for a no-fault scheme in relation to motor vehicle accidents. Last year, CAP sent a memorandum on the subject to the prime minister, the Finance Ministry and BNM on this.

Under no-fault, it becomes irrelevant who is responsible for the accidents. Efforts are geared towards assisting victims of road accidents, and not in establishing who is at fault. All injured victims get compensation, with some exceptions in the case of motorists who flout the law, who are injured in motor vehicle races, those convicted of drink or drug driving offences as a result of accidents, those convicted of committing a crime at the time of the accident etc.

CAP proposed that the scheme run by the Transport Accident Commission in Victoria, Australia as a suitable model to emulate in Malaysia, taking into account that modifications will need to be made to enable the scheme to be suited to local circumstances.

Victoria’s Transport Accident Commission (TAC) is responsible for Victoria’s transport accident scheme which is in essence a no-fault scheme, but also has among its foremost aims the prevention of accidents and the rehabilitation of persons injured by road traffic accidents. Aside from its role to pay for treatment and benefits for people injured in transport accidents, it is also involved in promoting road safety in Victoria and in improving Victoria’s trauma system.

The TAC is a state-owned monopoly provider of transport-related personal injury accident compensation. It is a statutory business enterprise established by the Transport Accident Act 1986, and owned by the Victorian government. The minister of finance exercises responsibility over the TAC, and it is overseen by the Department of Treasury and Finance. The TAC operates as a commercial insurer and is funded both by premiums and investment income generated on reserves.

If such a scheme were to be introduced in Malaysia, a specific piece of legislation must be introduced to regulate the scheme and an agency along the lines of Socso must be set up to administer and run the NFL scheme. Alternatively, a state-owned corporation could be set up to run the entire no-fault scheme. A corporation is preferred to a government agency, as while the latter may eventually be beset with bureaucracy, the former can function independently while being able to operate as a profitable entity in the long run. At the same time, being fully owned by the Government, it would be expected to prioritise social security and the aims of the scheme, as opposed to mere profits.

Opponents have pointed out that a no-fault scheme may encourage accidents since the guilty party will not be punished (Motor Insurance – reconsider your stand CAP). Yet with the implementation of the NFL in 1987 in Victoria, there has been a 29% drop in road fatalities between 2000 and 2009. This was achieved by carrying out intensive road safety campaigns. We can do the same, but our efforts have to be more aggressive and messages more hard-hitting than they currently are.

Naysayers have also said that NFL only works in a social welfare state. In a welfare state the state takes responsibility for the welfare of the citizens. In Malaysia, we have done this with workmen’s compensation (Socso) for instance. NFL schemes have been introduced throughout the world, and not only in welfare states. Each country which practices no-fault has a scheme which suits its local circumstances. We merely have to consider which model is most appropriate for us.

Some have claimed that premiums will increase under an NFL system. CAP has proposed that funding for the scheme could come from existing insurance third party premiums and a portion of comprehensive insurance payments. As legal and administrative fees of insurance companies can be expected to go down as there will no longer be a need to prove fault, existing premiums may suffice.

We agree that BNM is not proposing an NFL scheme. During the 2007 discussions, it was widely known that the whole NFL idea mooted by the attorney-general then was at the lobby of the insurance industry, and that is why at that time government representatives made it clear that the government would not fund the scheme.

The proposal by the Attorney-General’s Chambers then involved insurance companies administering the scheme. CAP had at that time, while stating its stand in support of no-fault, made it clear that it would not support any such scheme being run by insurers. At all times we said it ought to be run by the government.

In fact, in New Zealand and some other jurisdictions, insurers are not involved. It appears now that insurers have found another proposal to lobby the government with, on the same basis that there is an underwriting deficit in relation to TPBID claims. We say that if the insurance industry finds this sector running at a loss, don’t run it. Let the government take over.

In relation to objections to the NFL scheme:

From a moral perspective – there are exceptions to payment of compensation in an NFL scheme – please see above. Recklessness is to be dealt with by the Road Traffic Act. No one will be encouraged to be reckless or negligent merely because their injuries will be covered. In any event, even under the current system, damages are not paid by the reckless drivers personally but by their insurers. That is why NFL must be a complete package – coupled with serious efforts aimed towards reducing road accidents and not mere sloganism.

From a social perspective – fraud already exists in the current tort system. Litigation is fraught with delays, which opens up opportunities for fraud and corruption. A no-fault system is meant to create an informal mechanism of resolving disputes and ensures claims are resolved quickly and efficiently. To beat fraudulent claims, effective control mechanisms, including a proper fraud detection system must be in place to minimise fraud or abuse of the system. Enforcement must be strict and consistent. Procedures must be simplified, so that injured parties can place their claims directly, without the involvement of intermediaries or agents.

From an economic perspective – why should there be an increase in premiums? With reduced administrative expenses and elimination of payments to lawyers etc, there would be adequate funds to provide relief to everyone injured in accidents, and therefore there is no need to increase the premium. In addition, funding may also come from Socso. Socso deals with claims by workers for injuries occurring during the course of employment, including travelling to and from the place of work.

There will therefore be an overlap where workers suffer injuries in a MVA during the course of work. CAP has proposed that all cases of MV injuries come under the purview of the NFL scheme, including those covered by Socso. A portion of the contribution made to SOCSO can be allocated to the NFL scheme.

In summary, CAP agrees that major reform is overdue in how we compensate victims of motor vehicle accidents. However, such reform should put the public interest as priority and must not, in any circumstances, be at the behest or for the profitability of insurers.