Columnists

Fixing Kenya’s costly third-party motor vehicle insurance

accident

Summary

  • Insurance companies in Botswana wanted to increase motor insurance premiums by 600 percent.
  • On January 1, 1987, the Botswana Motor Vehicle Accident Fund (MVA Fund) was born out of necessity.
  • An MVA fund is a social protection scheme whose aim is to cushion the vulnerable from falling into poverty.

Premium rates for motor insurance in Kenya are planned to increase by up to 50 percent in 2022, prompting the Kenya Human Rights Commission (KHRC) to file a case against the Insurance Regulatory Authority (IRA). Interestingly, Kenya finds itself in a very similar situation to Botswana in 1987.

Insurance companies in Botswana wanted to increase motor insurance premiums by 600 percent. On January 1, 1987, the Botswana Motor Vehicle Accident Fund (MVA Fund) was born out of necessity. An MVA fund is a social protection scheme whose aim is to cushion the vulnerable from falling into poverty.

The Botswana MVA does this by ensuring that third party road accident victims are rehabilitated back to normal life, by compensating injury and rehabilitation costs as well as providing loss of income compensation and promoting road safety.

If you were involved in an accident as a pedestrian in Kenya today, for example, would you know where to start? Most likely, you would be approached by what we call ambulance chasers. The ambulance chaser would assist you by taking you to the hospital, paying for your hospital bill, and committing to assist you in the insurance claim process.

This would entail getting you a doctor that would likely exaggerate your injuries so that you get maximum compensation, as well as ensuring that the police report is in your favour. However, there’s a catch: you’d have to share this compensation with him as well as the third-party lawyer that he works with — anywhere between 30–50 percent of your compensation.

In contrast, in countries such as Botswana and Namibia, instead of the insurance company dealing with your claim, it would be handled by a motor vehicle accident fund (MVA Fund). You would be the client of the MVA fund. Like any organisation, the MVA Fund has its performance scorecard, and the timely and fair settlement of your claim would form part of its performance objectives.

The current system used for the compensation of victims in Kenya is similar to most African countries. Third-party motor vehicle insurance is compulsory so by default, all road users, including pedestrians, are covered. Compensation claims for victims are handled by insurance companies. However, there are a few challenges with this.

The current situation is not tailored with the victim as the central party, as the victim is not the client of the insurance company. The victim often ends up getting delayed and inadequate compensation because of this.

Secondly, motor insurers are facing persistent losses due to the challenge in charging adequate premium rates to cover the victims (this is normally the loss-making aspect of motor insurance).

In effect, insurance companies are not just compensating victims, but third-party lawyers and ambulance chasers as well. This is financially unsustainable and would be unaffordable for consumers if this full burden is passed on to them.

The financial unsustainability also affects the government as the National Hospital Insurance Fund (NHIF) also pays compensation for injuries of victims.

The insurance industry has also faced challenges getting all insurers to work together in initiatives such as fighting fraud (this is a worldwide problem), as well as raising awareness on road safety, which they easily can do given the vast amount of data they collectively hold. If there’s one thing that the Covid-19 pandemic has taught us, it is that prevention is better (and often cheaper) than cure. Road safety awareness and prevention of fraud are more sustainable than addressing the problems after they happen.

An MVA Fund in Kenya would address these challenges in more ways than one. Firstly and most importantly, the MVA Fund’s main client would be the victim. The fund would have a shareholder agreement with the government, as well as a service charter, which would include, amongst others, key performance indicators such as customer satisfaction and turnaround times for claims.

Secondly, an MVA Fund is likely to be financially sustainable, likely reducing the need to increase premium rates. Different funding models can be considered. For example, motor and medical Insurers could cede a portion of their premiums to the MVA Fund, in return for the MVA Fund completely taking on the risk of compensating the victims. An Actuary would easily be able to calculate this.

In addition, given the large amounts of money that the MVA Fund would collect, it would generate much more investment income than the insurance industry is generating separately. The economies of scale, as well as the benefits of pooling of risks (collection of risks so that unpredictable risks can become predictable) would also enable the fund to reduce the amount spent on claims and expenses.

The MVA Fund legislation would define sustainable compensation parameters, as opposed to allowing judges to determine this. It would also have a better chance of reducing fraud by reducing the need for lawyers via its enacting legislation (Botswana and Namibia have successfully done this).

For example, in Namibia, less than one percent of claim costs are paid for legal settlements, meaning 99 percent of claims paid out by the MVA Fund go to the compensation of victims.

The MVA Fund would also have the resources to hire emergency response services to provide assistance immediately at the scene of an accident. These services would be powered by automation, such as the ability to send a WhatsApp message with a picture of the accident scene.

If done well, the role of the ambulance chasers, doctors and third-party lawyers could change so that they support these emergency response services. The MVA Fund would also have a division that reimburses NHIF for any injury costs incurred on behalf of victims.

Lastly, the MVA Fund would have centralised data on all motor vehicles in the country. This would enable and empower initiatives that have long been a challenge for the insurance industry, such as a fraudster’s database.

Ms Gatu is a Resident Actuary at Zamara Rwanda and a member of The Actuarial Society of Kenya