Figures tell different story on third party insurance

ROB STOCK

DESPITE PUBLIC enthusiasm for compulsory third party car insurance, premiums currently charged by insurers look unlikely to discourage bad driving or price teenage drivers out of powerful cars.

The numbers appear to support Transport Minister Steven Joyce's view that compulsory insurance would not cut New Zealand's crash toll, but a closer look paints a different picture.

Currently AMI Insurance, for example, charges a flat $199 third party premium for an 18-year-old driver with a clean record, whether they buy a modest Honda Civic 1600, a more grunty Honda Accord 2200 or a powerful Honda Integra Type R.

The AA would charge $220 for the Honda 1600 and $248 for the 2200.

Premiums are slightly higher for riskier drivers. AMI subsidiary The Car Lovers Insurance Company asks $300 to insure someone with a modified 1600cc Honda Civic (lowered, fat exhaust, tinted windows) and two to three "incidents" of an "average" nature, rising to $334 and $374 for the 2200 model and the Type R.

Worsen that driving record with two "reasonably significant" at-fault accidents and a couple of speeding tickets and premiums rise to $450, $478 and $530.

But that would not prove much disincentive to hardcore boy racers, said AMI's John McSweeney.

"You can get third party insurance in the worst cases for around $500 a year. That's the cost of two tyres on some of these cars."

According to the Automobile Association, young people are six or seven times more likely to be involved in a crash than an average driver, so how do insurers manage to keep their premiums so low?

One reason, said Joyce, is because ACC – partly paid for by drivers through levies on petrol and registration – effectively provides third party personal injury cover, unlike countries such as Britain where car insurance is compulsory.

But another factor is the level of excess on these policies.

Currently, the excesses on youngsters' third party policies are very high to keep premiums cheap.

At The Car Lovers Insurance Company, for example, under-21s have a minimum excess of $1200, but some elect higher ones. AMI has an excess of $750. At the AA, under-21s have a minimum excess of $900.

That might cover most of the costs for a driver who totalled someone's new Mercedes, drove into someone's living room or crashed and sparked a fire that burned a commercial forest, but it wouldn't fit the conception of adequate insurance for someone rear-ended with a bill to fix their car of $2000-$3000.

A compulsory regime would have to set maximum excesses to avoid people being able to buy cheap forms of cover with huge excesses. Set it at $500, for example, and the premiums would have to rise significantly.

McSweeney said: "If that was imposed legislatively, or an insurer chose to go down that path, the premiums would have to be higher.

"To drop an excess by $250 would require a pretty substantial increase [in premium]. Off the top of my head, it could take an increase of $150 to go down by that much."

And though the premiums today do not seem to provide much of a disincentive to young drivers wanting fast cars, there could be a big change should compulsory third party insurance be brought in.

McSweeney said: "Third party insurance is not the most common form of insurance so we have been very generic with it. There would be more differentiation if a compulsory market was created." In other words, third party insurance is such a small market, it is not being priced for risk in the same way comprehensive cover is, and as the only people who really use it are responsible drivers with good records and cars worth so little they do not think they are worth insuring, a spike in demand from currently uninsured drivers with a poor driving record would see insurers working harder to charge lower-risk drivers less and higher-risk drivers more.

In pouring cold water on compulsory insurance, Joyce this month quoted research commissioned by the ministry suggesting just 7.6% of cars were not insured – a level similar to that found in Britain.

The finding, from a phone poll of 4000 people, has been criticised and contrasts with research under Labour indicating a figure of around 25%.

John Grant, insurance researcher and commentator for Interest.co.nz, said: "Whenever there is a natural disaster it transpires that around a third of people are underinsured, around a third are over-insured and the rest have no insurance at all. Do we really believe if people are not insuring their house and contents that they are insuring their cars? It is just not consistent."

It was particularly hard to believe that a country noted for its underinsurance "she'll be right" attitude had similar levels of car insurance coverage to countries like the UK where it was compulsory under law and being caught uninsured led to fines, driving bans and your car being confiscated, Grant said.

He pointed out that previous estimates from the insurance industry ranged from 13% to 40%, and in October, AA Insurance said a third of all crashes with its policyholders caused by a third party were with uninsured drivers.

That broadly correlates to the Association of British Insurer's view that uninsured drivers in the UK are nine times more likely to have crashes than insured drivers.

Research based on the Auckland Car Crash Injury Study found that uninsured drivers had a "significantly" increased risk of being injured or killed in a car crash.

If the 7.6% figure was correct, said Grant, the minority of uninsured drivers appear to be causing a disproportionate amount of mayhem on the roads.

Such nuggets of information are suggestive, but Alan Perry, AMI's product manager, said while uninsured drivers caused more than 7.6% of crashes, its experience was it was nowhere near as high as the AA, and unlike Grant, he reckons the new estimate of underinsurance may be a little on the low side, but is the best information we have to date.

The industry remains opposed to compulsory insurance, arguing there is no compelling evidence that it would make the roads safer, and that the costs would outweigh the benefits.

Perry thinks public support is more about "social equity" than road safety.

"People with insurance say `I'm acting responsibly and insuring my car, why shouldn't they?"'

Experience overseas shows unless money is spent on enforcing the rules (visible stickers on the windows, refusing the issue of WOFs and registrations to those without insurance, making it impossible to cancel insurance unless a car is sold or a new insurance policy issued, linking up driving licence databases with insurance databases to sniff out the uninsured), drivers realise the chance of being caught is low and compliance is lessened.

Also, no industry wants government meddling in its normal business activities – insurers would rather be able to refuse insurance to some drivers than be forced to provide a level of compulsory cover.

While Joyce's statements so far indicate the government won't introduce compulsory insurance, Grant said that there is too much uncertainty over the information so far presented and more work needs to be done before deciding whether the publicly popular policy would be helpful or a costly white elephant.

- © Fairfax NZ News