Tirana, April 19, 2013 — Albanian Financial Supervisory Authority (AFSA) and a World Bank team of insurance experts organized today a workshop with market participants and other stakeholders to present the achievements and recommendations of a technical assistance project on Restructuring Motor Third Party Liability (MTPL) Insurance Market in Albania. The project has been financed under the World Bank – FIRST initiative.
The objective of the project has been to assist the AFSA in the development of policies and processes to enable the move away from centrally-managed tariff-based pricing toward fully liberalized risk-based pricing of the products on the MTPL insurance market. The purpose of this change is to: (i) enable more homogeneous risk underwriting practices, (ii) enhance administrative and regulatory efficiency and (iii) increase consumer responsibility through the introduction of a dynamic link between costs of MTPL premium and road behavior. The project has also aimed to assist the AFSA align the relevant domestic insurance market legal framework with the European Union directives, consistent with Albania’s commitments under the Stabilization and Association Agreement with the European Union.
More specific objectives of the project have been to create a legal and regulatory environment that would reduce the claims frequency and diminish the number of fraudulent claims. The project has looked towards greater incentives to encourage motorists to drive safely. The project has seen it as particularly important to reduce fraud because without care and attention, fraud is a continuing penalty on the whole community.
The project has addressed shortcomings in three main aspects:
· On the regulatory aspect, the project helped produce the Road Map paper laying out the principles and recommendations for the liberalization of the MTPL market;
· On the IT aspect, the project helped design a set of policy and claim handling process, common data base, and a comprehensive fraud database structure. In addition, the project provided an IT governance procedure guideline;
· On the actuarial aspect, the project provided : (i) methodology for benchmarking coefficients for an initial risk-based-pricing of the MTPL policies; (ii) actuarial report for the assessment of the ultimate claims reserves for the whole Albanian market which highlights quality data, methodology applied, recommendations for the future, particularly, in the area of best practice for an effective data collection;
The project activities were designed to equip the AFSA with the tools necessary to liberalize the MTPL market and help the market players and other stake holders reach a clear understanding of the changes that will come into force with market liberalization. With an improved actuarial technology and availability of adequate databases, it is expected that the liberalized market will become more efficient at pricing risk and this will also allow for marketing the products accordingly. On the other hand, insurers will have more incentives to improve claims management and reach higher profit in return.
The key element to be considered in achieving the above objectives is the introduction of the concept of risk-based-pricing. This includes: (i) increasing drivers' responsibility - drivers who cause accidents should pay a higher premium-different risks require different price; (ii) drivers with small size engine cars should be paying lower premiums compared to large engine cars; (iii) encouraging young males, who have a higher tendency of speed driving, to drive smaller cars through premium incentives.
The project also leaves behind clear recommendations to create a central statistical center and central fraud unit. These, if implemented effectively, will play a key role in achieving the objectives.
The cost of insurance is related to the frequency of accidents. If the later will be reduced, then over time the price of insurance will decline. Recent price movements have been very turbulent and this turbulence will continue in the short term. The main causes of this turbulence appear to be the prioritizing of market share regardless of the true cost of the exposure assumed. This is common feature of a newly liberalized market. Equipping the marked with a modern statistical methodology and database will contribute to offering insurance products that are priced on a stable basis.
The following challenges lie ahead at the completion of the project and at the start of implementation of its recommendations:
· Improvement of data availability and quality.
· Increasing awareness of all stake holders on the potential value of the risk based principle.
· Improving legal framework regarding a transparent compensation system and approving and implementing of draft law on Law on Compulsory Insurance within the transport Sector.
The sustainable MTPL insurance system cannot emerge instantly and without any development pain. Insurers need to build a solid database hence a critical requirement for both the regulator and the insurers is the improvement of the IT system, as well as upgrading and retaining professional capacity of their staff. Albanian insurers can gradually move towards a balanced system where the pricing is stable and built in such a way that safe driving is strongly encouraged.
FIRST supports low- and middle-income countries in their efforts to strengthen financial sectors and ultimately achieve greater economic development and poverty alleviation. We offer small scale and short-term grants for Technical Assistance (TA) projects that contribute to more stable, more efficient and more inclusive financial systems.