Canadian Underwriter

Exploring the regions where auto insurance isn’t mandatory

August 16, 2016   by Martha Porado

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In Bolivia, they get their cars blessed. More specifically, many Bolivians take part in the tradition of travelling to Copacabana where a priest conducts daily car blessings.

This “tells you something about how wild the driving is in Bolivia,” says Julian Dimon, travel writer and TV personality. “They need to pray for safe passage.”

But other than this spiritual consideration, Bolivia is like the majority of countries: it has localized legislation stipulating that drivers purchase mandatory minimum third-party liability insurance before a vehicle is considered road-ready.

There are those countries, however, that veer from this path. Some, like New Zealand, have no minimum auto insurance requirements.

“In New Zealand, insurers are not governed by regulations requiring prescribed minimum policy coverages,” says John Lucas, insurance manager with the Insurance Council of New Zealand. “However, insurers are mindful that the insurance market places an emphasis on reputation, so it’s important motor insurance products contain no shortfalls or gaps.”

Instead of minimum required coverage, New Zealand has implemented the Accident Compensation Corporation (ACC), a no-fault fund that goes toward compensating those affected by road accidents.

“Bodily injury from a motor accident is provided [for] by the ACC, which is funded from a levy on… vehicle annual licensing and from a tax on petrol,” Lucas says. “Currently, for every litre of petrol sold, 6.9 cents goes to fund the ACC.”

While there are no formal statistics surrounding how many drivers simply choose to go uninsured in New Zealand, Lucas believes it’s roughly 10 per cent.

Driving in New Zealand is “possibly no more or less dangerous than [driving in] other Western countries,” Lucas says. For a low-risk driver and vehicle, basic third-party liability insurance would be about NZD$200 (CAD$190); for comprehensive insurance, around NZD$500 (CAD$450).

“Motor gross written premiums in 2015 were NZD$1.5 billion,” with the largest motor insurance players in the country being Insurance Australia Group and Suncorp, he says.

While the majority of New Zealanders agree they should be insured regardless of whether the law requires it, the question becomes why they operate differently from a global standard of practice.

“New Zealanders forego the right to sue for bodily injury and related loss of earnings; 24-hour, no-fault coverage is provided,” Lucas says. “This keeps motor insurance costs lower; however, there are limits to compensation. New Zealand is possibly not as litigious as other countries.”

Canadian content

To recognize the significance of the expense over which New Zealand’s government has taken control, we need to compare procedures in Canada. Here, compulsory minimum third-party liability insurance exists in all Canadian provinces and territories, with slight variations in required coverage amounts. In Prince Edward Island, Ontario, the Yukon, Newfoundland and Labrador, Alberta, New Brunswick, Nunuvut and the Northwest Territories, the minimum liability coverage is $200,000 and must be sought from a third-party insurer.

In other provinces, drivers are required to purchase insurance from their relevant provincial insurer (i.e., the Insurance Corporation of British Columbia, Manitoba Public Insurance or Saskatchewan Government Insurance).

In Quebec, drivers must seek coverage from the Société de l’assurance automobile du Quebec and a private insurer, with $50,000 compulsory minimum third-party insurance.

Nova Scotia is like the majority of provinces except that minimum liability coverage is $500,000 more than twice that of all other provinces and territories.

Further afield

South Africa has a system similar to that of New Zealand. The South African Road Accident Fund (RAF) provides compulsory liability insurance not only for citizens but also for anyone driving within the country’s borders. The coverage goes toward “injuries sustained or death arising from accidents involving motor vehicles,” the RAF website explains. “This cover is in the form of indemnity insurance to persons who cause the accident, as well as personal injury and death insurance to victims of motor vehicle accidents and their families.”

The motivation for such a fund in South Africa is made abundantly clear. “Free markets, and in particular the private sector, do not fully address the impact of road accidents on society and on the economy,” the RAF website states. “The Road Accident Fund provides a social security safety net to the country and economy by making available compulsory social insurance cover to all users of South African roads.”

Like New Zealand’s fund, the bulk of the RAF is provided from a levy on fuel and also from a per centage of regular fuel tax. The current level for 2015/16 is ZAR$1.54 (C$0.13) per litre.

Russia represents a special case. The country has been fairly distinct in its approach since it came on board with compulsory third-party liability auto insurance, just over a decade ago. All of a sudden, a new, captive market was open for business.

“Initially, it was great for insurers—people didn’t quite know what or how to claim, tariffs were sufficient and insurers made great profits,” says Nikolaus Frei, CEO of OJSC IC Allianz Russia in Moscow.

However, Allianz is no longer pursuing an active strategy for providing motor insurance in Russia. When asked how profitable a venture offering auto insurance has been in recent years, Frei says, “It was unprofitable. Hence, we stopped. “Over time, insurers started to increase profitability by squeezing claims payouts further. This directly led to a new consumer protection law that enabled consumers to sue insurance companies and brought to life the whole cottage industry of ‘auto lawyers,’” he says.

“This, in turn, led to the disastrous situation we have now. Allianz, for instance, had in the peak year over 40,000 court cases against us, which led to our decision to largely abandon the OMTPL (obligatory motor third-party liability) market.”

With top companies like Allianz reluctant to serve the area, Russia’s journey towards joining the rest of the world in this area is far from complete.

“The situation is unresolved, causing social problems (unavailability of policies in some regions) and massive losses of the top insurers, threatening their solvency,” said Frei.

The U.S. experience

Closer to home, certain U.S. states differ from the usual third-party compulsory insurance as well.

In New Hampshire, where the state motto is “Live free, or die,” there’s no minimum coverage requirement. “New Hampshire has a reputation for favouring limited government,” says Michael Barry, vice-president of media relations for the U.S. Insurance Information Institute.

“New Hampshire is the only U.S. state where a driver can operate a vehicle without having first purchased an auto insurance policy,” he says.

Nonetheless, although there’s no legislation requiring drivers to purchase auto insurance, the Insurance Research Council (IRC) indicates that more than 80 per cent of all the state’s drivers choose to buy a policy to protect themselves, Barry says.

These numbers suggest the choices of New Hampshire’s citizens don’t differentiate them too dramatically from those of other states—even with the absence of legislation. In an August 2014 IRC report (the most up-to-date numbers being from 2012), about one in eight drivers in the U.S. was uninsured.

Insurance premiums in New Hampshire also fail to suggest that the lack of legislation has pushed prices drastically in either direction.

“New Hampshire drivers who purchased an auto insurance policy paid, on average, US$733 in 2013, according to the National Association of Insurance Commissioners,” says Barry. This average rate combines liability, comprehensive and collision insurances.

“Comprehensive and collision coverage are optional in every U.S. state, but around four out of every five U.S. drivers choose to purchase both comprehensive and collision,” he says.

“Drivers in 30 U.S. states paid, on average, more than [New Hampshire’s average] for auto insurance in 2013, a sign that comparatively fewer auto claims are filed there. In another positive development for New Hampshire safety, the number of highway deaths in the state dropped significantly in 2014 compared to 2013,” he says.

While lower premiums suggest New Hampshire is relatively safe, Barry doesn’t believe the lack of legislation actively discourages drivers from insuring themselves. “I think New Hampshire’s drivers act in their own economic self-interest,” he says.

Incidentally, New Jersey had the highest average auto insurance expenditure in the same year, at US$1,254.10.

In Virginia, there are no minimum coverage requirements either, according to its Department of Motor Vehicles (DMV). However, in order to register a vehicle, an uninsured driver must declare his or her status at the time of registration and pay a US$500 Uninsured Motor Vehicle Fee that remains valid for only 12 months.

Mississippi does have minimum coverage amounts, but rather than purchasing insurance, drivers can post a bond or make a cash or security deposit that matches the necessary amounts. The Mississippi DMV defines these amounts as US$25,000 per person for bodily injury, US$50,000 per accident for bodily injury and $25,000 per accident for property damage.

While there will always be those drivers who prefer to go it alone, brokers can take comfort that the majority will insure themselves, whether a law requires them to or not.

Copyright © 2016 Transcontinental Media G.P. This article first appeared in the August 2016 edition of Canadian Insurance Top Broker magazine

This story was originally published by Canadian Insurance Top Broker.