Old vehicles on third party insurance are costing the insurance industry hundreds of millions annually…. but would converting them to comprehensive helps?

Are you doing it right retaining the old vehicles?

Are you doing it right retaining the old vehicles?

Performance of old vehicles in a nutshell. It is already common knowledge that old vehicles (≥ 15 years category) in the absence of adequate loading on the tariff gross premium are not writable risks, and especially so where more than 90% were on third party cover. Given ample opportunities to analyse industry statistics, I have made a conclusion that portfolio consisting of old vehicles is not something for the industry to savour in.

Portfolio of Old Private Vehicles. The trend for portfolios underwritten during underwriting year 2007 and prior shown deterioration with claims ratios (ie. total claims from old vehicles divided by total gross premiums emanating from this same category) hitting pass the 150% mark as losses from ACT-related developed towards “full blown”. Well, can’t help…relating this with Aids or cancer growth… It seems many insurers were caught during the final quarters of 2008 and first quarter of 2009 when professional actuary started digging deeper into their resources in assessing the General Insurance Liabilities (ie. Premium and Claims Liabilities) in line with the RBC regime; and in the process blowing up the Incurred But Not Reported (IBNR) reserves or was this also about Incurred But Not Enough Reported (IBNER)??  To matter worse, such assessments are all on 75% confidence level, a 25% deviation from the usual Best Estimate (or 50% confidence level) computation.

Furthermore, management expenses and commission have yet to be factored in – which if done should hit about 200%.

Conversion of third party to Comprehensive Coverage.    Management of most insurers have already put third party cover under declined and the Central Bank has directed insurers not to imposed additional policy purchases (like PA) against the intention of the customers. Under pressure from agents and to circumvent business outflow, marketers (with the usual creative ways) have started converting existing third party renewals (or even competitors’ third party policies) to Comprehensive policy. Is this good for insurers already holding a substantial Motor portfolio in their books?

The Testing Scenarios for Third Party risk portfolio.           Let us start some scenario testing in respect of what is in store in the process of converting your existing third party policy portfolio to comprehensive….

The following table shows a typical third party private vehicle portfolio – Average loading imposed is about 75% on the basic tariff premium and you have a 20,000 private vehicles in your underwriting books.

Private Vehicles with Cubic Capacity not exceeding 1,650
Third Party Portfolio Basic unit Premium 75% load on Basic Premium for 20,000 vehicles Claims ratio Est. Total Claims
ACT 67.50 118.13 2,362,500 220% 5,197,500
Non-ACT TPPD 13.50 23.63 472,500 120% 567,000
Total 81.00 141.75 2,835,000 203.33% 5,764,500
Commission (10%)         283,500
Management Exp (18%)         510,300
Total UW Costs         6,558,300
Total UW Loss         3,723,300
Gross Loss Ratio         231.33%

(Loss Ratio is inclusive of commission and management expenses. Claims Ratio is derived based on claims case-reserves inclusive of Adjusting and other direct handling fees – the ratios depicted in the scenario tests are worked out from various ISM’s derived statistics.)

The test scenario adopted for the above is quite conservative – Firstly, we take it that the industry did impose an average portfolio loading of 75% of the basic third party tariff premium. The industry claims ratio for ACT is 255.41% for calendar year 2008 but here we work on a 220%. The industry indicator for number of accident involving a third party vehicle stands at nothing less than 1.8% of the total number of vehicles underwritten – this means for every 100 cars underwritten, there will be 1.8 (~ 2) cars involved with accident causing damages to a third party vehicle. If each and every case involve a TPPD claim of RM2,000 the total claims quantum on TPPD should hit 1.8%x20,000×2,000 = RM720,000

However, we did not take the 1.8% factor, instead work conservatively (giving more than the usual benefit of a doubt to the agency and marketing personnel) at ~ 1.41%, and this gave us RM567,000 in TPPD claims or 120% claims ratio.

The total therefore, works out to RM5,764,500 or 203.33% of Gross premium. Therefore, even if conservative factors are applied the loss ratio is still damned high! So high that all insurers are determined to have third party insurance policy thrown out of their books.

Scenario testing for conversion from third party to Comprehensive.                 It was good feeling to have converted the third party renewals to comprehensive but was the original objective of out-casting the third party risks met in the process? Thus back to testing again…..

We used the following factors in this test scenario:

  1. The minimum Sum Insured for such conversion is RM8,000 per vehicle irrespective of its actual market value. You may say the industry is forcing some customers to buy what I termed “clouds” – they will never get paid the full Sum Insured in event of a total loss….
  2. Assuming the ACT and TPPD claims (both quantum and frequency) are similar to the above “third party” test scenario. Thus, the claims ratios arrived at are 257% and 140% respectively.
  3. For the Non-ACT, “Others” claim figure, we based it on 54% of the unloaded (or basic) portion of its premium. Before the 50% loading the total Non-Act (Others) premium is RM7,050,000 computed as 20,000×352.50. Why 54% loading? The industry non-Act claims ratio is 59.34%, thus it is fair to work on 54% if we take out the TPPD aspects of the claims.
Private Vehicles with Cubic Capacity not exceeding 1,650.

Sum Insured of vehicle pegged at RM8,000 minimum

Conversion to Comprehensive   Basic unit Premium 50% load on Basic Premium for 20,000 vehicles Claims ratio Est. Total Claims
ACT 67.50 101.25 2,025,000 257% 5,197,500













Total 433.50 650.25 13,005,000 73.60% 9,571,500
Commission (10%)         1,300,500
Management Exp (18%)         2,340,900
Total UW Costs         13,212,900
Total UW Loss         207,900
Gross Loss Ratio         101.60%

Not too bad…. the Total UW loss now stands at RM207,900 indicating a breakeven is near! Thus if you have loaded the “poor” customers nothing less than 50% in addition of hanging “clouds” over him…. your conversion portfolio should be acceptable for the timebeing.

The Reality counts. However, in reality….very seldom loading of 50% occurred although you may get something between NIL loading and 25% loading. Thus, if you work out the figures with the 25% load factor… you should get a 116.32% in gross loss ratio, which is not a good bet in this conversion exercise bearing in mind we have assumed that this ACT claims quantum of RM5,197,500 would remained and not developed beyond the deterioration curve.

Are those Non-Act premiums capable of providing additional support to the ACT losses? This is not about the conversion exercise having produced a better UW position than writing third party risks with an average portfolio loading of 75%. It is really about that portion of the Non-Act premiums – whether the amount is capable of supporting the unexpected deteriorating Act losses……. bearing in mind the ACT premium is now lower at 25% loading compared to the 75% load previously. In cases of new vehicles the amount of Non-Act premium is sizeable thus there are likelihood of the balance (after deducting for OD, TPPD and Theft claims) capable of supporting the deteriorating patterns of the Act losses – at least in the shorter term.

On the other hand, if we are to mix this with those conversions made in respect of commercial vehicles…..the pressure on the bottom-line is surely unrelenting…


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13 comments for “Old vehicles on third party insurance are costing the insurance industry hundreds of millions annually…. but would converting them to comprehensive helps?

  1. El_pistolero
    May 15, 2015 at 15:53


    Do you know what is the maximum loading for commercial vehicle comprehensive coverage? Did bank Negara publish it somewhere?

  2. edward
    February 1, 2010 at 20:11

    Is there any latest on the national bodily injury liability scheme which is supposed to be raised in Parliament in July?

    • February 2, 2010 at 23:06

      Nothing…. still very secretive at the moment, but don’t know why top secret. Think… it should be almost the same as with current practice, except there will be a cap on the third party liability (bodily injury and property damage) claims for compulsory third party liability insurance. In this new scheme, looks like every vehicle owner is to purchase a compulsory third party insurance but insurance company’s limit to third party liability is up to perhaps RM500,000 any one accident / event – there will be a schedule of compensation, which would be gazetted in Parliament come July….

      In other words if a rich man is knocked out cold by a ordinary wage earner, the rich man can only claim up to RM500,000 the most, if that ordinary guy only has a compulsory third party policy. The rich man’s only option is to use the money to sue our wage earner until bankrupt since he does not really need to RM500,000. So at the end, the wage earner became pokkai and the rich man has no compensation.

      The best practice is, the wage earner should on top of the basic compulsory third party liability insurance buys a top-up liability cover, with limit ranging from RM500,001 to RM50 million – in layering options, where the wage earner can chose the type of layers that he thinks is reasonable to meet the demand from the rich man.

      After the implementation of this new scheme, I guess, rich man would seek to avoid poor man and poor man trying hard to avoid rich man. If you are in the middle, what should you do? Avoid who? Well, you can never know while you are in the middle, just buy more cover, that’s the true answer! So you see, the poor middle class income guys sufferred again!

  3. Kim
    January 14, 2010 at 21:54

    I think there is a mistake to your calculation in the second table. SInce the policy had been converted to comprehensive, the loading allowed by Bank is limited to 15% in most circumstances, the calculation is wrong. Anyway is still good illustration that converting to compr is clearly not viable when loading by the Bank can only goes up to 15% limit!

    • January 14, 2010 at 23:51

      Yes, we are awared of the limit on loading imposed by the Bank Negara. The illustration is just to show the minimal loading amount that we need if we wanted to turn a portfolio of third party risks into comprehensive cover profitably. Thus, we need something in the region of 50%! However, this is no guarantee that eventually the portfolio will be profitable….. much of the Act ultimate loss computation is driven by actuary.

  4. December 23, 2009 at 01:48

    I think can agree with U, old motor vehicles are more often found involved in serious accident. Yesterday and the day before, newspaper reported an accident where an old Proton wacked into a lorry carrying vegie, two died. At a toll somewhere, a Proton also, old one, skidded and rammed into between toll booths.
    I think lack of maintenance, brake not working and blah, blah, blah. But how to maintain, this costs money and each time do maintenance, the amount runs up to RM100 if done with the backyard repairers. If the well known ones, the amount always go up till RM300!
    The NAP is correct to insist an annual checking by Puspakom but now had already became history.

  5. Anonymous
    December 13, 2009 at 00:06

    It is now very common for agents to convert the existing TP to comp, especially for vehicles exceeding 10 years. If we over do it then this would be a bad thing for the insurance company. Old vehicles are alway having issues with poor maintenance, brake that does not works well during emergency and often equated with financially poor folks. Very old vehicles should be examined and certified by an authorised board before allowing to be on the road which was the aspiration of the national automotive policy but this was already shot down. The industry is like throwing out the shit but bringing them back after some repackaging! Good write.

    • December 13, 2009 at 01:31

      Dear anonymous,

      Although I hate to bring down the less financially fortunate part of our society but it is a fact and their lives together with their passengers’ are at stake if the vehicles are not properly maintained. Just the other day an old 20 odd years Ford Laser shot through a Mall in Kota Bahru and killed two peoples, and today the newspaper reported that a just married man was killed after unable to control his old Proton and swirled into the path of an oncoming bus! Over at the northern states there are quite alot of old vehicles exceeding 12 years – the end result of underwriting such vehicles in those states is always bad – remember the Gua Musang chain collision?

      • Anonymous
        December 15, 2009 at 02:07

        It is not fair to assume that converting the third party insurance to comprehensive is certain to make the losses. At least doing it this way can make a better bottomline compared to third party cover. IF you say, third party make losses and do comprehensive also make losses, then better don’t underwrite motor insurance! Is this correct?
        Thank you!

        • December 17, 2009 at 08:37

          I must say this is true – writing motor insurance is now very difficult simply because of two reasons (at least that’s what I saw in the immediate position…) – firstly is the implementation of Risk-Based Capital (RBC), where the actuarial assessment of the premium reserves and claims reserves are much more stringent now than before, and secondly, Central Bank (the “authority”) was not able to get the industry the necessary premium increase. With such development or non-development, insurers are now more cautious with their acceptance approach – increasing their selection criteria when accepting motor risks so that they can trim down losses and with hope that they can secure better investment from the motor premium collected.

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