There is a big change in compulsory insurance, here is the MNB proposal

In recent days, two news about the compulsory motor civil liability insurance (KGFB) have deeply moved the professional public. On September 11, the MNB published for the first time a circular requesting the KGFB to review the fee rates, and on September 15, the Commissioner for Fundamental Rights announced that it would initiate an amendment to the KGFB regulations on the rate setting. Although the MNB explained the purpose of issuing the circular in a statement, various interpretations have come to light since then.

The KGFB has always been the center of attention, for two main reasons. On the one hand, it is a key product of the national insurance market, since it represents an important part of the total income from insurance premiums (20% in 2019, 230,000 million HUF). In addition, due to its mandatory nature, it affects a large sector of the population, currently around 5.6 million clients. The risks of the product are also distinguished from other insurances: the determination of the premiums is made difficult, for example, by international or personal damages that are difficult to calculate in advance. These can take a long time to settle, up to ten years. In the case of the latter, the reserve risk also appears, that is, how much the insurer must reserve for the final payment of damages.

KGFB’s market uncertainty is also due to these uncertainties: a profitable period for insurers is often followed by unprofitable years. In the early 2010s, this deteriorated to the point where the composite indicator for non-life insurance products, the combined indicator, rose well above 100% (Chart 1). The combined indicator of 122% observed in 2012, for example, meant that insurers paid an average of 122 HUF in damages and costs for every 100 HUF in premiums. The KGFB market was consolidated in 2016.

To reduce significant risks, the MNB has developed a statistical insurance concept. In addition to expanding the data published on the website, its main objective was to create the detailed database of the central KGFB (CCCTB), which enables closer supervisory monitoring and in-depth analysis through detailed contract and loss data that they date back to 2011.

The MNB has set itself the goal of assisting insurers with CCCTB. After lengthy consultation, starting in December 2019, insurers that provide CCCTB data can consult aggregated data, thus supporting their own premium and reserve calculations. Data return alleviates the problem for institutions with fewer staff and less experience: due to incomplete data and statistics, they calculate their rates with greater uncertainty and higher security surcharges, thus their rates are higher.

This phenomenon can occur mainly in the case of non-residential motor vehicles, such as changes in the rates of buses, tractors or trailers. The so-called Price means that, without an adequate basis for damage statistics, the insurer offers a high premium for which no insured will take out insurance. Because of this, a given group will not find, or will only find, a sufficient number of offers in a multiple of its parameters. This is contrary to the legal nature of the KGFB, which, as market conduct, is in any event objectionable.

The topic of surcharges, especially pest surcharges, also comes up from time to time. The MNB also received several consumer complaints in this regard, in which customers, in addition to the amount of the surcharge, the length of the considered period (how many years caused damage) and also complained that a surcharge is still applied to them.

To resolve the above problems, the MNB issued a circular to insurers a few days ago. By implementing this, market participants themselves can take steps to comply with the law. The Insurance Law establishes that in the case of non-life insurance products (such as KGFB), the calculation of the premium must include, among other things, the loss and risk distributions used or other statistics. In other words, the insurer must base the calculation of the premium with calculations. In the vast majority of cases, insurers meet this requirement, but the data available from the CCCTB also allows for a numerical derivation that could not be done previously due to lack of data. During the elaboration of the circular, the MNB finalized it with the market and took it into account, taking into account the comments.

Among other things, the MNB circular calls for the determination of pest surcharges on a risk basis rather than price intent, in line with the bonus-malus system. According to our market analysis, although the surcharge rate increases by around 50%, it varies on a very wide scale, between 10% and 400%. This large variation also raises questions about risk justification, but other issues also arise. The application of surcharges that are multiples (two or three times) of the basic rate can override the complete calculation of the risk-based rate, emptying the bonus-malus system, widely known and easy to interpret. High pest premiums therefore weaken the understanding and transparency of the system, which can increase consumer risks and undermine public confidence in insurance.

Some newspaper articles suggest that pests are aggressive and irresponsible drivers, while the pest surcharge has a deterrent effect. It should be noted that this is not the case for the vast majority of pests. The essence of the KGFB is that, in case of damage, it compensates the harm to the innocent party, and the “punishment” of the offender is a higher rate for the following periods. In the event of gross negligence (for example, driving while intoxicated), the insurer pays, but recovers it from the injured party. A lower pest surcharge likely would not make drivers behave more irresponsibly on the roads, and thus also would not increase the frequency of injuries.

Incidentally, the incidence of claims on the total insured portfolio has been steadily decreasing in recent years: from 3.33% in 2016 to 2.97% in 2019. Higher surcharges mainly serve as a deterrent, “pricing” , the actual pairing is presumably done only in small quantities at that price, most of them looking for a cheaper solution. It is easy to see that changes in the surcharge for a small proportion of customers may also have a small effect on charges for other customers, while other effects have a significant impact on both up and down charges. Changes in charges are much more affected by changes in the frequency and magnitude of damage, through which, for example, component prices and service charges increase.

The effect may be further mitigated by competition between insurers, as lost premium income may not or may only be partially passed on to customers. This is also true because in the first half of 2020, as a result of the pandemic restrictions, KGFB claims developed at a record low level and therefore KGFB’s bottom line from insurers developed very favorably (Graph 2) .

The increase in premiums is also countered by a resolution issued by the European Insurance and Occupational Pensions Authority (EIOPA) in July this year that requires insurers to evaluate their products separately in light of a pandemic situation, for For example, if they provided adequate coverage at the right price. The result of the evaluation can also lead to a redesign of the product, but there may be, for example, an increase in compensation bonuses or even a refund of insurance premiums.

As we have seen in KGFB’s domestic market, otherwise in line with the European examples, claims costs were well below the usual level, so it is worth considering which of the steps proposed by EIOPA may be relevant in the national market. The characteristics of the KGFB product, such as the long duration of damage or persistence or even the specific nature of the pandemic effect, must be taken into account. In any case, the favorable claims expected this year will determine the scope of next year’s rate increases.

Overall, the goal of the MNB steps is to refine the KGFB premium calculation for insurers, which, in addition to supporting legal compliance, can also create a balance within the risk community and stimulate competition.

The authors are the head of the Actuarial Department of Magyar Nemzeti Bank and the Supervisory Board of Insurance, Cash and Intermediaries.

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