2015

Formula 1 Team

Captains of Industry Programme 2015

11/12/2015

TOPIC #7: COMPULSORY THIRD PARTY INSURANCE

Integrity Intensity Intelligence Innovation

F1 TEAM 1

EXAMINE THE ROLE OF A POTENTIAL THIRD PARTY COMPULSORY INSURANCE

SCHEME FOR MOTOR VEHICLES, AND HOW THIS COULD BE IMPLEMENTED IN ORDER

TO IMPROVE MARKET PENETRATION FOR MOTOR INSURANCE.

Declaration of Authenticity

We Formula 1 hereby declare that the content of this document is our/ my own work and that all

sources used have been referenced.

Signed (Syndicate Members):

Lwando Sangcozi

Lulu Mkhize

Michael Khumalo

Thabani Msibi

Kathleho Matoba

Khanyisani Makhanya

F1 TEAM 2

TABLE OF CONTENTS

Declaration of Authenticity ......................................................................................................... 1

Glossary of Terms ...................................................................................................................... 3

1. EXECUTIVE SUMMARY .................................................................................................... 4

2. SITUATION ......................................................................................................................... 5

3. CONCERN .......................................................................................................................... 6

4. QUESTION ......................................................................................................................... 8

5. ANSWER ............................................................................................................................ 8

6. REASONING ...................................................................................................................... 9

7. EVALUATION ....................................................................................................................16

8. CONCLUSION ...................................................................................................................18

Table of References ..................................................................................................................19

Appendices ..............................................................................................................................20

F1 TEAM 3

Glossary Of Terms

Third Party Insurance:

In many countries compulsory third party insurance generally provides protection against two

scenarios, which are:

1. The costs from injuries caused to another person as a result of a car accident (RAF)

2. The costs of repairing or replacing another person's property damaged by you as a result of

a car accident. This is usually the damage caused to another person's car, but could also

include personal items inside the car and other property like fences and cycles, or public

property such as power poles and street signs.

SADC: Southern African Development Community

SADC Protocol: A Protocol is a legally binding document committing Member States to the

objectives and specific procedures stated within it. In order for a Protocol to enter in to force,

two thirds of the Member States need to ratify or sign the agreement, giving formal consent and

making the document officially valid. Any Member State that had not initially become party to a

Protocol can accede to it at a later stage. (SADC, 2015).

SMME: Small, Medium & Micro Enterprises

Financial Inclusion: Financial inclusion is the proportion of South Africans using financial

products and services, formally or informally. (Finscope, 2011)

ZAR: South African Rand

VAT: Value Added Tax

FSB: Financial Services Board

Comprehensive Motor Insurance: Financial Services Board

SAIA: South African Insurance Association. It represents the industry at all levels and with all stakeholders to ensure a sustainable and dynamic industry for the benefit of all South Africans. Its members abide by the SAIA Code of Conduct, which ensures adherence to best-practice industry standards and self-regulation.

F1 TEAM 4

1. EXECUTIVE SUMMARY

This report was commissioned to examine the role of a potential third party compulsory insurance

scheme for motor vehicles in South Africa, and how this could be implemented in order to improve

market penetration for motor insurance. The research was focused on the how to design a

compulsory scheme that can be successfully lobbied with government and various stakeholders,

is able to sustainably fund itself, and that is in the best interest of all motorists. This has to be

done by getting a proper understanding of all the stakeholder needs, risks and concerns, and

designing a scheme that can meet the majority of these.

During the research it was established that the need for compulsory insurance is already being

discussed and the insurance industry, National Treasury, motor industry, and SAIA are already in

full support of principle. It was also determined that most motorists understand what 3rd party

cover is, and see the need for it. However, there are some stakeholders such as the Department

of Transport, who might not be in favour, for political reasons. It was determined that the solution

designed must meet the criteria of affordability, adequate cover for motorists, profitability for

insurers, adequate consumer protection for motorists, efficient procedures to collect premiums

and recognition of insurance issued in other countries.

The business cases conducted indicated that the best solution is the roll out of a 3rd party scheme,

compulsory for each vehicle owed, at a cost of R45 per month per vehicle, with cover limited to

R50 000 per incident. This scheme is to be run by individual insurance companies, with

competition open to all registered financial service providers registered under the Short Term

Insurance Act, enforced by the Department of Transport, and regulated by the FSB. Proof of

insurance from countries will be accepted for foreign drivers visiting South Africa.

This option is considered to be affordable for motorists and the cover of R50 000 is also adequate

to meet most accident costs. The business case has proved to be profitable for insurers and

government. It is expected that the administration will be run efficiently and in a flexible manner

as result of the competition that will be opened to all insurers to compete for the same customer.

The regulation by the FSB will ensure adequate protection for consumers. This model is line with

the international benchmarks in countries that have already successfully implemented

compulsory insurance.

F1 TEAM 5

2. SITUATION

2.1 Low uptake of 3rd party insurance & under-insurance of motorists

Two thirds of South African motorists are currently not insured for 3rd party damage. This poses

numerous challenges for the motorists, the government, the community and the insurance

industry. Of a total of 10,4 million vehicles on South African roads, 3,4 million are insured. The

rest are either un-insured, un-roadworthy or unlicensed. That means that 10% of all South African

cars are likely to crash, and only a 3rd of those can afford the attached costs of repairs. This

equates to 40% of all motor insurance premiums generated in South Africa (Smith, 2014).

2.2 High number of motor accidents

According to the first major report on road injury prevention jointly issued by the World Health

Organization (WHO) and the World Bank, road traffic injuries are a huge public health and

development problem, killing almost 1.2 million people globally each year and injuring or disabling

between 20 million and 50 million more (WHO, 2011). Serap says that both WHO and World Bank

data show that, without appropriate action, these injuries will rise dramatically by 2020, particularly

in rapidly motorizing countries. South Africa, as a low- and medium-income country, faces similar

challenges especially with an estimated of only a third of motor vehicles insured. South Africa

has one of the worst rates of road accidents in the world. In fact, there are 27.6 road fatalities per

100 inhabitants in South Africa. Developed countries in North America and Australia are 10.4 and

5.6 respectively (Wikipedia, 2015). The majority of causes for accidents are behaviour related.

2.3 High cost of comprehensive motor insurance

The cost of vehicle insurance is providing to be very difficult for most South Africans to afford. As

part of this research, a questionnaire was submitted to a number of motorists to understand if

their cars are insured, and the reasons why, if not insured. 83% of respondents stated that

affordability of insurance was their main reason for not taking up insurance on their vehicles. Even

those who are already covered stated that affordability is still an issue. (Refer to Appendix A).

2.4 SADC Mandate

The SADC Protocol signed by the SADC member states, seeks to address third party insurance

in a harmonized manner. Some of the SADC members already have compulsory third party motor

property insurance in place. Compulsory third party motor property insurance has already been

F1 TEAM 6

successfully implemented in many other countries in the region, such as Malawi, Mozambique,

Namibia, Zimbabwe. (SAIA, 2010).

3. CONCERN

3.1 Affordability of insurance

There is a concern that as a result of the under-insurance of the majority of tourists, the average

South African motorists cannot afford comprehensive insurance in its current form. This situation

is highly unsustainable.

3.2 Financial liability for un-insured motorists

Un-insured motorists face a risk of having big payouts in the event of an accident, particularly

when damage is cause to a 3rd party. This places an extra burden on the already cash strapped

motorists who have to deal with high petrol prices, high maintenance costs such as tyres, and

higher e-tolls for Gauteng motorists. The cost of repairs has increased significantly over the past

few years, and is highly influenced by fluctuations in the Rand exchange rate. The Road Traffic

Management Corporation estimates that there are 960 000 crashed in South Africa per annum.

The average cost of repairs for these is R32 000 each (Road Traffic management Corporation,

2011). An excess of R15 billion is spend in South Africa on vehicle repairs. 80% of the claims

occur as a result of accidents, and 20% as a result of theft. This is a significant shift from a few

decades ago, when the numbers were the other way around. 85% of accident are due to Human

error – disregard of rules, unsafe overtaking, speeding, drunk driving, fatigue, distraction etc.

10% are caused by vehicle errors, such as tyre burst, steering problems, loss of control, poor

vehicle Maintenance 5% Environmental - Wind, potholes, tree branches and rocks.

3.3 There is no liability for foreign motorists

When drivers from neighboring countries such as Lesotho and Swaziland are involved in

accidents whilst in South Africa, they can easily go back to their respective countries without

having met any 3rd party obligations where an accident involves other parties. That is because

there are no legal mechanisms to ensure that foreign visitors have compulsory insurance before

entering the countries. This however, is not the case for South Africans who drive into countries

such Mozambique and Zimbabwe, which already have compulsory insurance.

F1 TEAM 7

3.4 Profitability for insurers

The profitability of providing comprehensive insurance is proving more and more difficult for the

majority of short term insurance companies. There is evidence of insurers moving out of

unprofitable businesses. (PWC, 2015). The loss ratio for the personal lines business is

unsustainably high for most insurers. More and more insurers might move away from

comprehensive motor insurance and more to the more lucrative products such as assistance and

credit life. This puts a significant strain on insurance industry profits. There is also an increased

risk of car damages as a result of hail. In a survey conducted by KPMG on short term insurance,

insurers with significant motor books highlighted their disappointment with the average repair cost

for the motor hail claims being substantially higher than the historical averages for these types of

claims. It appears that the volume of the hail claims put substantial strain on the repair shops in

Gauteng which culminated in the insurers not being able to manage the cost of the claims as

under normal circumstances. Many insurers have as a result reassessed their claims settlement

procedures that will apply if such an event occurs again. (KPMG, 2013).

3.5 Disproportionate share of the burden

There is a concern that the share of the risks for accidents on South African roads is

disproportionately borne by the 1/3rd that is currently insured. Victims of accidents should ideally

be compensated for the damage caused to their vehicles by others. Conversely, those who cause

damage should have a responsibility and obligation to make amends for the damage. (SAIA,

2010).

3.6 SADC Mandate might not be complied with

South Africa is by most measures, a leader and trendsetter in the SADC context. There is

therefore an expectation for South Africa to take the lead with regard to the implementation and

roll-out of compulsory insurance.

4. QUESTION

Given the above situation and the concerns thereof, the question is: “What factors should be

considered to get buy-in, in order to implement compulsory 3rd party insurance in a sustainable

F1 TEAM 8

manner. The following was the outcome, using the Systems thinking Interrelationship diagram

(Refer to Appendix B):

Chart 1: Systemic Stairway ™

5. ANSWER

According to chart 1 above, the most important factors to consider are the stakeholders that are

affected by the under-insurance situation, as well as the legislation and enforcement.

6. REASONING

Upon Interviews with Mzayiya Sondiyazi of SAIA and Barry Scott, an expert on the topic, it was

established that the following stakeholders are the most key to focus the research on:

F1 TEAM 9

The experts were all of the view that unless a proper analysis of the needs and interests of the

stakeholders that affected is conducted, the exercise will be futile.

6.1 Motorists

With the on-going increase of cars in the roads of South Africa, the question is how big this is an

impact to other motorists’ safety. Despite the stringent road safety enforcement strategies, road

accidents continue to rise and result to fatalities and damage to property. Contributing factors

identified as the cause of motor vehicle accidents are human, vehicle and road factors. The

introduction of a compulsory form of insurance for all motorists would mean that everyone has at

least some form of basic protection through insurance cover and will ensure a more equitable

distribution of the financial burden of motor accidents. Compulsory third party motor property

insurance would make insurance more affordable for all those who do currently insure their

vehicles as the costs to insurance companies will be reduced. However the pertinent issues

around third party insurance which have a direct link with affordability is the issue of funding model

and who will run the system. The needs and risks of motorists can be summarized as follows:

(a) Perceived value of 3rd party or comprehensive insurance

A survey conducted on motorists by the syndicate indicated that about 80% of motorists see the

value in comprehensive insurance and identified that there is a need for all motorists (Refer to

Appendix A). Motorists always need to be prepared to safe guard own financial situation. If

coverage is low then there is a risk of a shortfall in cover in relation to damage to third party's

property. However, high coverage limitations can cost great deal more in monthly premiums. It

appears therefore that there is no great need to convince motorists of the need for the 3rd party

cover.

(b) Risks borne by motorists

Fault for causing an accident is either created by law or defined by common law. Common law

recognizes four basic levels of fault namely; negligence generally means careless or inadvertent

conduct that results in damage, which is quite common in automobile accidents. One can be

negligent by failing to do something, such as not yielding the right-of-way to avoid an accident, as

well as by actively doing something (such as running a red light). Strict liability (regardless of fault)

may be imposed, even in the absence of fault, for accidents involving certain defective products

or extra hazardous activities (such as the transporting of explosive chemicals). Thus, fault in an

accident may be established merely by citing a statute that has been violated. A motorist

presumed to have caused an accident by virtue of a statutory violation bears the burden of proving

F1 TEAM 10

that this act of negligence was not a proximate cause of the injuries. Insurance coverage is some

of the best tools available when it comes to risk management. The most important factor to

mitigate this risk is by ensuring the designed solution has adequate cover.

(c) Affordability of premiums

The rising cost of motor insurance in South Africa is fast becoming unsustainable for many

consumers. This, combined with the high volume of uninsured vehicles on the roads, has made

it increasingly crucial that new measures such as compulsory third party be considered. Currently

many insurance companies struggle to recoup costs from third parties who have no form of

insurance. If the insurance companies are unable to recover this money then they must fund these

repairs themselves; and the only way to do this is to increase premiums for the wider pool of

policyholders. As a result, those who do have insurance cover are being forced to cover the costs

for those who do not.

The current third party motor liability premium is about R50 per month (this represents 8% of an

average comprehensive motor premium. Based on the kind of vehicle this could increase the

premium to R100 per month. The designed solution has to be affordable enough to be below the

current average of R50.

(d) Quality Service -

With motor vehicle accidents often more than one party may have contributed to the accident so

the accident may not be solely one driver’s fault, for example, another car runs into your car.

There needs to be an increase in the number of certified and qualified panel beaters to ensure

that the motorists get access to good quality service.

6.2 Government

Upon interviews of industry experts, it was established that the two departments are not

necessarily aligned in their approach to 3rd party insurance. Upon its engagements with the

department of transport, SAIA was given an ultimatum to support e-tolls in return for the

department’s support of compulsory insurance. This means it will be very difficult to obtain political

support required for this stakeholder, and the main selling point for them will be to demonstrate

how the proposed solution will reduce road accidents. The approach to National Treasury will be

somewhat different, as they have already demonstrated some support for the idea. They already

requested SAIA to conduct a study on the subject. Big Business and SMME’s refers to corporate

South Africa.

F1 TEAM 11

(a) Department of Transport

The Department of transport’s main needs and priorities with regard to motor insurance are as

follows:

(i) Road Safety:

As indicated in section 2.2, the majority of road accident are as a result of behaviour issues. A

calculation was done on the road fatalities per 100 000 cars comparing the averages of countries

with compulsory insurance, versus countries without. The graph below shows that countries with

compulsory 3rd party insurance have a lower average than those without. There is a widely

accepted school of thought that motorists’ behaviour changes when they have to pay for

insurance. As mentioned above, there is a significant number of un-roadworthy vehicles in South

Africa, and the age/roadworthiness of vehicles is one of the contributing factors to high accident

rates. An increase in the number of insured cars could result in a decrease in the number of un-

roadworthy cards.

Chart 2: Fatalities per 100k vehicles

(ii) Law Enforcement:

It has been established through interviews of industry experts that the Department of Transport

is generally concerned with developing solutions that can be enforced. Whatever solution is

proposed as part of this project needs to be possible for law enforcement agencies in the country

to implement and monitor. The number of traffic officers on the roads needs to be increased.

12

894

77 9

412

62

-

200

400

600

800

1 000

Developed Developing Newly Industrialised

Fatalities per 100k vehicles

No 3rd Party Insurance 3rd Party Insurance

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(b) National Treasury

(i) Economic Growth:

The National Treasury is concerned about the economic growth rates in South Africa, which are

currently significantly lower than the African and emerging economy averages. It needs to be

demonstrated that the introduction of compulsory 3rd party insurance will result in an increase in

the economy and consequently, unemployment. An increase in the economy would be as a result

of increased revenues for panel-beating companies as a result of an increase in the number of

vehicles that are able to repair after an accident or damage.

(ii) Revenue Growth:

Revenue growth is a direct result of the increase in the economic growth rate. If there are more

companies generating higher revenues, then the fiscus is increased. An increase in employment

rate can also contribute.

(iii) Consumer Protection:

The solution generated needs to be ultimately in the best interest of the motorist and South

Africans at large. Any solution that is biased towards increasing profits for big corporates will be

met with resistance.

(iv) Financial Inclusion:

The government is concerned with financial inclusion. Financial inclusion in this target market is

currently very low. Financial inclusion is the proportion of South Africans using financial products

and services, formally or informally. The concept has gained the South African government’s

attention and recognition as a vehicle for sustainable and inclusive growth and development. In

addition, government in recent years has undertaken a number of initiatives to accelerate financial

inclusion. The opportunity identified is particularly with regard to increased inclusion in the banking

and insurance sector. Improving the South African motor penetration rate will result in a

significantly improvement in the financial inclusion.

(v) SMME Growth:

An increased pool of insured vehicles will result in an increase in revenue for panel beaters, which

are generally black owned SMME’s.

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(vi) International Relations

The SADC protocol on Transport, Communications and Meteorology has mandated member

states to investigate mechanisms for the creation of a harmonised system of third party insurance

in the Region. South is the biggest economy in the region, and whatever policies are implemented

here will have a significant impact on the region as a whole.

(vii) Equity & Fairness:

It is very important that the financial burden of road accidents in South Africa is borne evenly by

all motorists. Currently it is disproportionally carried by the 30% who are insured. Compulsory 3rd

Party Insurance would address this issue by spreading the risk more evenly amongst motorists.

(viii) International Benchmarking

It is important to demonstrate that there are countries that have implemented compulsory 3rd party

insurance, in the developing world, developed world and emerging markets. The designed

solution needs to demonstrate that learnings have been taken from these international examples.

From the study conducted, it appears that all countries have introduced a statutory limit to the

cover. However, these limits seem to vary significantly between developed and developing

countries. The cover limit is per incident, not annual. With the exception of Ghana, the

determination of premiums is left to the competition between insurers. There are currently no

government underwritten schemes. All countries allow individual insurance companies to

underwrite. The majority of the countries require that the vehicle is insured, whilst some require

that a driver is insured before they drive any vehicle. (Refer to Appendix

6.3 Insurance Industry

Insurance companies are also a user and buyer of third party insurance because they have to

implement most of the policy aspects. While insurance companies are also businesses they have

a significant vested interest in motor vehicle accidents and their associated costs. Specifically,

the largest risk insurance companies’ face is that of insured vehicles having accidents with

uninsured vehicles. We have already estimated the probability of this event at 70%. This forces

insurance to increase premiums due to the unsustainable business risks. This has the further

impact of reducing the number of insured vehicles further thereby denting business growth. In

some insurance companies that fail to collect losses from accidents introduce unreasonable

controls which further reduce consumer trust. This increases the number of uninsured vehicles.

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6.4 Civil Organisations and Organised Labour

Civil Society refers to stakeholders such as Cosatu and Nedlac. Due to their immense political

power and ability to sway public opinion in South Africa, it is very important to consider their needs

and design an approach that will satisfy them. South Africa is a country where social partners

have historically been involved in tripartite consultations on economic and financial policy choices.

The experience of trade union involvement is relevant beyond this particular country inasmuch as

it shows the relationship between policy choices in domains, which may seem unrelated to the

issues of conventional in social dialogue, and employment. The financial system of South Africa

is a two-tier system. On the one hand, South Africa is home to highly developed, competitive

financial sectors and it is regarded as one of the ten largest financial markets in the world, (2010,

Ludwig). Its high quality financial products are deemed to be tailored for privileged elite and large

companies.

6.5 Business Case

After all the above into consideration, the following options were selected for consideration:

Option 1: Compulsory 3rd party insurance, at R45 per vehicle monthly, with cover up to

R50 000 per incident, obtained on registration of the vehicle, administered by individual

insurance companies, and enforced through the display of a car disc.

Option 2: Compulsory 3rd party insurance, at R45 per motorist monthly, with cover up to

R25 000 per incident, obtained on getting a driver’s licence, administered by individual

insurance companies, and enforced through the display of an insurance certificate

(a) Financial Summary (Refer to Appendix D for detailed calculations)

The financials indicate the following:

Option 1

After tax profits for insurance companies will increase by R1bn in the first year of implementation

up to R4.5 bn by the 10th year. The auto repair industry will benefit by seeing an increase of

R384m in profits growing to R538m in 10 years. Government will see a net revenue of R500m in

the first year, growing to about R2bn in 10 years. This appears to be a financially sustainable

model.

Option 2

After tax profits for insurance companies will increase by R1.5bn in the first year of implementation

up to R4.6 bn by the 10th year. The auto repair industry will benefit by seeing an increase of

R300m in profits growing to R428m in 10 years. Government will see a net revenue of R653m in

F1 TEAM 15

the first year, growing to about R2bn in 10 years. This also appears to be a financially sustainable

model. Other factors need to be considered in the cost benefit analysis below:

(b) Cost Benefit Analysis

Table 1: Cost vs Benefit Analysis

Driver/ Stakeholder Desired Outcome Weighting Option 1 Option 2 Option 1 Option 2 Comment

Affordable Insurance 1.00 5 5 4.30 4.30 Both options cost R45 per month.

Safety 0.50 2 2 1.00 1.00

Financial Security 1.00 4 1 4.00 1.00

Option 1 has a cover limit of R50 000.

Option only covers up to R25 000.

Quality of Service 0.20 4.00 4.00

Neither option would have an impact

on the quality of service

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Ease of Enforcement 0.6 4.00 2.00

Car discs under option 1 are easier to

enforce that insurance certificates.

Economic Growth 0.4 4.50 4.80 As per the business case

Revenue Growth 0.4 4.50 4.80 As per the business case

Financial Inclusion 0.4 4.00 4.00

SMME Growth 0.40 4.50 4.80 As per the business case

SADC Protocol 0.40 5.00 5.00

Fairness and Equity 0.40 5.00 5.00

Profitability 1.00 4.5 4.5 4.50 4.80

As per the business case, both

options are almost equally profitable.

Efficient

administration and

logistics 0.8 4.50 2.00

The short term industry is already

designed to administer vehicles and

assets, and not individuals, as per

option 2. The industry would

therefore be better able to run

option 1 more efficiently.

53.80 47.50

Scoring (1-5) Weighted Score

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7 EVALUATION

Table 2: Evaluation of the selected option

Overall, it is concluded that the desired outcomes are generally met.

Driver/

Stakeholder Desired Outcome

Outcome

Met? Comment

Affordable Insurance

2

The selected option costs monthly premium of R45. This is cheaper that the current average of

R50 for 3rd party cover. During the survery of motorists, it was determined that the majority of

un-insured and insured motorists found affordability to be the most important factor when

deciging whether or not to take out insurance.

Safety

0There is no quantifiable proof that compulosry insurance would result in incresed safety.

However, there is a general school of thought that if all motorists have to pay for insurance, this

would modify their driving habits for the better, thus resulting in a reduction in road accidents.

Financial Security

0

The average cost of repairs is currently R32 000. The fact that the cover limit is R50 000 means that

the majority of motorists would be able to cover the damage costs. This would mean a significant

reduction in the risk of payout. However, motorists still have to cover the costs to their own

vehicles if they do not have comprehensive insuramce. This outcome is therefore not met fully.

Quality of Service

2

The roll out of compulsory insurance would result in an increase in accredited and certified panel

beaters. That would mean better and higher access to quality panel beating service for the

majority of motorists.

Road Safety 0 Refer to above

Law Enforcement

2

The selected option include an increase in the number of traffic police in order to ensure that all

motorists on the road are covered. According to the business case, the scheme would be able to

fund the additional costs therein.

Economic Growth

2

The increase in the revenue for insurance companies would result in the employment of

additional staff. The hiring of additional staff for traffic police would also reduce unemployment.

The increase in the number of panel beaters would also result in additional panelbeaters finding

employment. Increased employment means economic growth.

Revenue Growth

2

According to the business case, the tax base for government would increase significantly. The

first source of revenue is the additional value added tax (VAT) on the premiums. The second

source is the income tax on the increased profits for insurance companies. The third option is the

additional tax from the increased number of panel beaters.

Financial Inclusion2

Introducing compulsory 3rd party insurance would result in an additional 6 million motorists

gaining access to the financial services market.

SMME Growth 2 An incresae in panelbeaters would result in SMME growth.

SADC Protocol2

Rolling out this plan would enable government to meet its obligations with regard to the SADC

protocol.

Fairness and Equity2

Compulsory 3rd party insurance means that the burden of the risk is shared more fairly amongst

all motorists.

Profitability2

According to the business case, profits would result increase for the industry by about R1.5

billion from year 1 and increase marginally over the years after the initial capital outlays.

Efficient administration and logistics

0

The administration of the scheme is run fully by insurance companies. This means that insurers

are left to compete amongst each other to provide efficient and afforable service to the

policyholders. This is considered to be significantly better than a scheme being run centrally by

government, such as the Road Accident Fund.

-2

Whilst the recommended premium of R45 is considered to be affordable for the majority of

policyholders, Labour unions might not be in support of any scheme that would result in

additional costs for their members. This is due to the fact that they consider their members to be

already paying to high a cost for being on the road. This was evident in their protest to e-tolls in

Gauteng.

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Affordable Insurance

Legends

2 Outcome fully met

0 Outcome partically met

-2 Outcome not met

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7.1 Implementation Plan

Table 3: Implementation Plan

7.2 Measurement of Success

The following key performance indicators need to be tracked to check the success of the

scheme:

SAIA

Representative

Insurance

Companies

Minister of

Transport

Minister of

Finance

Parliamentary

sub-committee NCOP

National

Assembly

Minister of

Tourism

Internati

onal

Relations

Minister

of Trade

&

Industry

Stakeholder Buy-In

Present the business case at SAIA

conference a

Obtain Feedback from SAIA members a

Present the business case to the

finance minister a

Present the business case at NEDLAC a

Draft Bill and Legislation

Prepare a Green Paper on Compulsory

3rd Party insurance a

Publish Green Paper for comments a

Draft a White Paper after obtaining

public comments and refining

accordingly a

Submit White Paper to the National

Assembly a

Refer the bill to the transport sub-

committee a

Publish the bill in the Government

Gazette a

Submit the draft bill to the national

assembly a

Submit the draft bill to the NCOP for

concurrence a

Submit the draft bill to the president

for assent a

The bill becomes an ACT

Implementation

Develop products that meet the

minimum requiremenents for 3rd

party insurancea

Publish/ advertise the need to take up

3rd party insurance by a set datea

Hire 15 000 additional traffic police aCommunicate the need for 3rd party

insurance before travelling to South

Africa to tourism agenciesa

Communicate the need for 3rd party

insurance before travelling to South

Africa to consulates and embassies

abroad

a

Roll out the system that integrates

eNATIS to insurance companies for

verification of cover during renewal of

licences

a a

Provide Training to enATIS staff on

how to verify insurance on the systema

Increase the number of certified

panelbeaters to meet the increased

demand, ensuring that BBBEE

objectives are advanced.

a

F1 TEAM 18

Table 4: Key Performance Indicators of Success

8 CONCLUSION

It is recommended that the following solution be implemented:

Compulsory 3rd party insurance, at R45 per vehicle monthly, with cover up to R50 000 per

incident, obtained on registration of the vehicle, administered by individual insurance

companies, and enforced through the display of a car disc. Insurance cover from other

countries, particularly SADC countries, must be recognised and accepted.

This is because the solution according to Table 1 above, has more benefits that the alternative solution.

Upon evaluation, it was also determined that this would meet the majority of desired outcomes for the

identified stakeholders.

Outcome Measure Source of measurement

Frequency

of measure

Measure

Reviewed By:

Affordable Insurance

Lapse rates on the scheme

across all the insurers SAIA Annual Annual

Road Safety

Number of road accients per

annum (before and after the

implementation) Department of Transport Annual Annual

Financial Security

Average cost of repairs per

accident vs Cover Limit (This is

to measure whether the cover is

adequate to meet the average

repair costs) SAIA Quartlerly Quartlerly

Quality of Service Customer satisfaction surveys

Retail Motor Industry

(RMI) Monthly Monthly

Law Enforcement

Number of motorists without

the compulsory cover Department of Transport Monthly Monthly

Economic Growth

Number of people employed as

a result of the scheme National Treasury Quartlerly Quartlerly

Revenue Growth

Additional Tax revenue as a

result of the scheme National Treasury Quartlerly

National

Treasury

Financial Inclusion

% of prople with access to

financial services (before and

after the scheme) National Treasury Annual

National

Treasury

SMME Growth

Number of additional

panelbeaters as a result of the

scheme

Department of Trade &

Industry Annual

National

Treasury

SADC Protocol

Whether the scheme is rolled by

the SADC deadline

Department of

International relations &

Coorperation Once -off

Department

of

International

relations &

Coorperation

Fairness and Equity

Average cost of comprehensive

insurance (before and after the

scheme). This measures

whether the scheme has

resulted in a decrease in the risk

profile of the average motorist

with cover. SAIA Quarterly

SAIA, National

Treasury

Profitability

Additional profits for insurance

companies as a result of the

scheme SAIA Quarterly

SAIA, National

Treasury

Efficient

administration and

logistics Customer satisfaction surveys Insurance Companies Monthly

Department

of Transport,

SAIA

F1 TEAM 19

Table Of References

1) Southern African Development Community (2015) SADC Protocols. [Accessed 08

November 2015] http://www.sadc.int/about-sadc/overview/sa-protocols/

2) Finscope (2011) [Accessed 28 June 2015] www.finscope.co.za

3) Official South African road safety data is supplied by the Road Traffic Management

Corporation (RTMC). This info graphic uses data from the RTMC's most recent Road

Traffic - Report for South Africa, issued in March 2011, to ensure accuracy, data used

for comparisons is also taken from 2011 sources.)

4) Smith, W. (2014). Sustainability of Motor Vehicle Insurance including the Lack of Third

Party Liability Cover for Damage to Property and the Effects Thereof.

5) World Health Organization (2011) Road Safety is a global public health issue [Accessed

13 August 2015] http://www.euro.who.int/en/countries/turkey/publications/road-safety-is-

a-global-public-health-issue

6) Wikipedia Organization (2015) List of countries by traffic related deaths [Accessed 24

September 2015] https://en.wikipedia.org/wiki/List_of_countries_by_traffic-

related_death_rate

7) Van Den Berg, D, Winterboer, T, Muguto, V et al (2015) Insurance Industry Analysis.

PriceWaterHouseCoopers, 5,

8) SAIA, (2010) Compulsory Third Party Motor Property Insurance in South Africa. SAIA

working paper. SAIA

9) Bester CJ, 2011. A Relationship Between Accident Types and Causes

10) Astrop A, 2012. Socio-economic Aspects of Road Accidents in Developing Countries

11) Swenson D, Eathington L, 2012. The Economic Impact of the Insurance Industry

12) Anderson FJ, 2012. Risk and Insurance

13) Gonulal S, 2010. Motor Third-Party Liability Insurance

14) Dale L, 2012. Advantages and Disadvantages of Third Party Motor Insurance

(C: The Advantages And Disadvantages Of 3rd Party Motor Insurance.htm(Accessed:

29/10/2015)

15) Karanzingi S, 2011. HARMONISATION OF THIRD PARTY MOTOR VEHICLE

INSURANCE SCHEME FOR THE COMESA/SADC/EAC REGION

F1 TEAM 20

Appendix A: Results Of Motorist Surveys

Customer survey Results

47% 50%

6%17%

47% 17%

0%17%

0%

20%

40%

60%

80%

100%

Yes No

Is your vehicle insured (Broken down by employment status)

Full Time Part-time Self Employed Unemployed

19%

81%

Male participants (Is your vehicle insured?)

No Yes

43%

57%

Female participants (Is your vehicle insured?)

No Yes

F1 TEAM 21

17%

67%

17%

Un-insured motorists( Broken down by Income Brackets)

Not Stated R26K-R35K R56K and above

50%50%

Un-insured motorists( Broken down by Gender)

Female Male

50%

17%

33%

Un-insured motorists( Broken down by Age of vehicle)

0 to 5 years 11 to 15 years 6 to 9 years

F1 TEAM 22

Appendix B: Inter-Relationship Diagram

83%

17%

Un-insured motorists( Broken down by Reason for un-insurance)

Affordability Car too old

F1 TEAM 23

Appendix C: Implementation Of Compulsory 3rd Party Insurance In Other Countries

CountryLimit Cover

(in ZAR) *

Premium

Regulated?Car/Driver

Premium

Collection &

Administrati

on

Enforcement

 Austria R 15 000 000 No Car

Individual

insurance

companies

On car

registration

 Belgium R 15 000 000 No Car

Individual

insurance

companies

Green Card

displayed on car

 Denmark R 204 000 000 No  Car

Individual

insurance

companies

On car

registration

 France R 15 000 000 No Car

Individual

insurance

companies

Display tag on

windscreen

 Germany R 15 000 000 No Driver

Individual

insurance

companies

The insurance

certificate

(Versicherungsz

ertifikat) must be

carried at all

times. There are

penalties for

drivers of

vehicles without

valid insurance.

 Ghana R 350 Yes Driver

Individual

insurance

companies

Certificate of

insurance

Malawi R 5 900 No Car

Individual

insurance

companies

Comesa Yellow

Card

 Mozambique R 94 000 No Car

Individual

insurance

companies

Comesa Yellow

Card

 Nigeria R 67 000 No Driver

Individual

insurance

companies

Car Tag

 Russia R 24 000 No Driver

The OSAGO

policy must be

carried at all

times while

driving. Together

with the

insurance

contract and the

policy paper

 United Arab Emirates R 1 833 000 No Car

Individual

insurance

companies

Orange Card

displayed on the

car

 United Kingdom R 21 000 000 No Driver

Individual

insurance

companies

Green Card

displayed on car

Zimbabwe R 20 000 No Unclear

Individual

insurance

companies

Certificate of

insurance /

security

F1 TEAM 24

Appendix D: Detailed Calculation of Profitability

Option 1:

ASSUMPTIONS

Inflation Rate 6%

Vehicle growth rate * 2.0%

Expense ratio 13.6%

% of premiums paid to Department of Transport 5%

Additional Traffic Personel 20 000

Effective Tax rate 25%

Auto-repair margins 20%

% of vehicles involving a 3rd party 10%

INSURERS: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Gross Written Premium per annum (Rmillion) 5 508 5 955 6 439 6 962 7 527 8 138 8 799 9 513 10 286 11 121

Premium per Policy per month 45R 48R 51R 54R 57R 60R 64R 68R 72R 76R

Number of registered vehicles (millions) 10 10 10 11 11 11 11 11 12 12 12

Claims per annum (Rmillion) 3 196 3 325 3 460 3 599 3 745 3 896 4 053 4 217 4 388 4 565

Cover Limit 50 000R 51 000R 52 020R 53 060R 54 122R 55 204R 56 308R 57 434R 58 583R 59 755R 60 950R

Average cost of repairs 32 000R 32 640R 33 293R 33 959R 34 638R 35 331R 36 037R 36 758R 37 493R 38 243R 39 008R

Average payout 32 000R 32 640R 33 293R 33 959R 34 638R 35 331R 36 037R 36 758R 37 493R 38 243R 39 008R

Number of car accidents involving a 3rd party 96 000 97 920 99 878 101 876 103 913 105 992 108 112 110 274 112 479 114 729 117 023

Underwriting Profits/(Losses) 2 312 2 630 2 979 3 362 3 782 4 242 4 745 5 296 5 898 6 556

Expenses (Rmillion) 1 039 1 123 1 213 1 310 1 415 1 514 1 637 1 769 1 913 2 069

Operating expenses 749 810 876 947 1 024 1 107 1 197 1 294 1 399 1 512

Payments to the Department of Transport * 275 298 322 348 376 407 440 476 514 556

Armotization Investment in technology (Rmillion) 75 15 15 15 15 15

Net Profits before Tax 1 272 1 507 1 767 2 052 2 367 2 728 3 109 3 527 3 985 4 488

AUTO REPAIR INDUSTRY

Additional Revenue (Rmillion) 1 918R 1 995R 2 076R 2 160R 2 247R 2 338R 2 432R 2 530R 2 633R 2 739R

Additional Expenses (Rmillion) 1 534R 1 596R 1 661R 1 728R 1 797R 1 870R 1 946R 2 024R 2 106R 2 191R

Additional Profits before taxation (Rmillion) 384R 399R 415R 432R 449R 468R 486R 506R 527R 548R

DEPARTMENT OF TRANSPORT:

Revenue

Receipts from Insurers 275R 298R 322R 348R 376R 407R 440R 476R 514R 556R

Expenses (Rmillion) 362 382 410 434 466 500 537 577 620 667

Salaries of additional traffic personell 300 324 351 379 410 443 479 518 560 606

Technology Investment 5 1 1 1 1 1

Training 10 5 5

Annual Disc printing costs 51 52 53 54 55 56 57 59 60 61

Net Income -87 -85 -88 -86 -90 -93 -97 -101 -106 -111

NATIONAL TREASURY 592 688 793 908 1 036 1 181 1 334 1 502 1 686 1 887

Income Tax Revenue 414R 477R 545R 621R 704R 799R 899R 1 008R 1 128R 1 259R

VAT Expense -593R -623R -654R -687R -722R -757R -797R -838R -882R -929R

VAT Revenue 771R 834R 901R 975R 1 054R 1 139R 1 232R 1 332R 1 440R 1 557R

Net Income for Government 506 603 705 822 946 1 088 1 237 1 401 1 580 1 777

F1 TEAM 25

Option 2:

ASSUMPTIONS

Inflation Rate 6%

Vehicle growth rate * 2.0%

Expense ratio 13.6%

% of premiums paid to Department of Transport 5%

Additional Traffic Personel 15 000

Effective Tax rate 25%

Auto-repair margins 20%

Number of cars per licenced driver 1.1

% of vehicles involving a 3rd party 10%

INSURERS: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Gross Written Premium per annum (Rmillion) 5 007 5 414 5 853 6 329 6 843 7 398 7 999 8 649 9 351 10 110

Premium per Policy per month 45R 48R 51R 54R 57R 60R 64R 68R 72R 76R

Number of licenced drivers with cars (millions) 9 9 9 10 10 10 10 10 11 11 11

Claims per annum (Rmillion) 2 497 2 598 2 703 2 812 2 926 3 044 3 167 3 295 3 428 3 566

Cover Limit 25 000R 25 500R 26 010R 26 530R 27 061R 27 602R 28 154R 28 717R 29 291R 29 877R 30 475R

Average cost of repairs 32 000R 32 640R 33 293R 33 959R 34 638R 35 331R 36 037R 36 758R 37 493R 38 243R 39 008R

Average payout 25 000R 25 500R 26 010R 26 530R 27 061R 27 602R 28 154R 28 717R 29 291R 29 877R 30 475R

Number of car accidents involving a 3rd party 96 000 97 920 99 878 101 876 103 913 105 992 108 112 110 274 112 479 114 729 117 023

Underwriting Profits/(Losses) 2 510 2 816 3 151 3 517 3 917 4 355 4 832 5 354 5 923 6 544

Expenses (Rmillion) 946 1 022 1 104 1 192 1 288 1 376 1 488 1 609 1 739 1 880

Operating expenses 681 736 796 861 931 1 006 1 088 1 176 1 272 1 375

Payments to the Department of Transport * 250 271 293 316 342 370 400 432 468 506

Armotization Investment in technology (Rmillion) 75 15 15 15 15 15

Net Profits before Tax 1 564 1 794 2 047 2 325 2 629 2 978 3 344 3 745 4 184 4 663

AUTO REPAIR INDUSTRY

Additional Revenue (Rmillion) 1 498R 1 559R 1 622R 1 687R 1 755R 1 826R 1 900R 1 977R 2 057R 2 140R

Additional Expenses (Rmillion) 1 199R 1 247R 1 297R 1 350R 1 404R 1 461R 1 520R 1 581R 1 645R 1 712R

Additional Profits before taxation (Rmillion) 300R 312R 324R 337R 351R 365R 380R 395R 411R 428R

DEPARTMENT OF TRANSPORT:

Revenue

Receipts from Insurers 250R 271R 293R 316R 342R 370R 400R 432R 468R 506R

Expenses (Rmillion) 282 297 317 335 359 384 412 442 474 510

Salaries of additional traffic personell 225 243 263 284 307 332 359 389 420 454

Technology Investment 5 1 1 1 1 1

Training 10 5 5

Annual Disc printing costs 46 47 48 49 50 51 52 53 54 55

Net Income -32 -26 -25 -18 -17 -14 -12 -9 -7 -4

NATIONAL TREASURY 685 778 879 991 1 113 1 253 1 399 1 559 1 735 1 926

Income Tax Revenue 466R 526R 593R 666R 745R 836R 931R 1 035R 1 149R 1 273R

VAT Expense -482R -507R -533R -561R -590R -619R -652R -686R -723R -763R

VAT Revenue 701R 758R 819R 886R 958R 1 036R 1 120R 1 211R 1 309R 1 415R

Net Income for Government 653 752 855 973 1 097 1 239 1 388 1 550 1 728 1 921

F1 TEAM 26

Appendix E:Number of Insured and Un-Insured cars

Chart 1: Number of insured vs uninsured vehicles (eNATIS, 2011)