Azerbaijan's AIA: Local Bonus-malus system needs serious review
BAKU, Azerbaijan, May 26
By Yusif Aghayev - Trend:
The Bonus-Malus system, accounting for increasing and decreasing coefficients, related to safe driving within compulsory motor-vehicle liability insurance (OSAGO), requires a serious review, Chairman of the Supervisory Board of Azerbaijan Insurers Association Azer Aliyev told Trend.
In insurance, a bonus-malus system (BMS) is a system that adjusts the premium paid by a customer according to their individual claim history. Malus is an increase in the premium if there is a claim in the previous year. Bonus-malus systems are very common in vehicle insurance.
In general, there are 17 classes of Bonus-Malus, the first 5 of which are classes of Malus (fines) that increase the insurance premium, and levels from 7 through 17 represent Bonus classes (discounts) that reduce insurance premiums. The 6th class of the system is applied during conclusion of the first compulsory insurance contract with respect to the vehicle and does not affect the amount of the insurance premium.
The coefficient of each policyholder in the Bonus-Malus system is determined once a year, January 15, and is valid until the same date next year.
“It should be noted that often citizens who sell their cars on the basis of a power of attorney do not cancel the OSAGO agreement that applies to the motor vehicle being sold, which in turn can lead to undesirable consequences associated with compulsory insurance in the future,” he said. “So, Malus class coefficients (fines) accrued under the Bonus-Malus system for traffic accidents happening due to the fault of the new car owner before the expiration of the OSAGO policy will be registered in the name of the previous owner.”
Aliyev pointed out that in the future, when acquiring a new OSAGO policy for another vehicle, the former owner will have to pay a higher insurance premium due to the previously assigned penalty factors (Malus).
“For example, if the new owner of the car makes several accidents on it, then the Malus coefficients accrued in the name of the former owner can reach the highest penalty group, which will triple the amount of the premium for the future OSAGO insurance policy,” Aliyev said. “But, on the other hand, car owners, who have been in several accidents whose Malus coefficient is quite high, 're-register' the car to another owner who is characterized by break-even driving and who has a Bonus coefficient registered in the system, and then continue to drive this vehicle on the basis of a power of attorney for driving.”
“As a result, the average premium of the insurance certificate for OSAGO has decreased over the past few years from 110 manat [$64.7] to 65 manat [$38.2] per policy, and the loss ratio for this type demonstrated very high rates. According to the results of 2019, the loss ratio was approximately 67 percent, while in the first quarter of 2020 it reached 84 percent, despite the fact that insurance premiums decreased by 4 percent compared to the 1st quarter of 2019,” he said.
“At the same time this coefficient does not consider for such expense items of insurers as calendar payments to the Compulsory Insurance Bureau (in the amount of 5 percent of the total premiums collected under this type), as well as business expenses and commissions to agents, which, amid the severe competition in the market, are quite high,” Aliyev pointed out. “As a result, the real loss ratios within this type are so high that many insurers refused active sales for this type of insurance, which was reflected in a decrease in the amount of premiums collected.”
“The system of accounting for increasing and decreasing coefficients (Bonus-Malus) should be reviewed in such a way that the cases of abuses by unscrupulous vehicle owners, as described above, would be excluded, and the information on the arising losses would reflect the real situation,” Aliyev said.
The AIA was established in 2006 as a voluntary association of professional participants in the insurance services market. AIA includes 20 insurance companies, one reinsurance company and five insurance agencies.
The compulsory insurance in Azerbaijan is carried out by insurance companies licensed for a certain type of compulsory insurance, included in the Compulsory Insurance Bureau. There are currently 15 such companies, 4 of which operate in life insurance, and 11 in non-life insurance segments.
Presently, 22 insurance companies and one reinsurance company operate in Azerbaijan.
(1 USD = 1.7 AZN on May 26)
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