A scheme under review
In June, the Treasurer announced the Government’s intention to introduce changes to the CTP scheme, which would deliver savings of up to $24 to Queensland motor vehicle owners on their CTP insurance as part of the 2010-11 Budget. The announcement marked the completion of a review into the CTP insurance scheme underwriting model.
In an environment of insurers all filing premiums at the Commission’s upper limit, the Treasurer asked the Motor Accident Insurance Commission in March this year to conduct a review into the CTP scheme’s underwriting model. The Treasurer asked the Commission to look at ways to improve efficiencies in the delivery of CTP insurance.
Armed with more than 15 years of statistical and actuarial information, and in consultation with the insurance industry, the Commission completed the review. While the scheme remained affordable, the review identified that there were ways to decrease the delivery costs and provide an environment to enhance price competition.
In search of competition
Prior to 2000, CTP insurance premiums were set annually by regulation and could not be varied by an insurer. Following amendments in 2000, the Government introduced a vehicle class fi ling model, providing insurers with a floor and ceiling within which they could fi le their premiums for each of the 24 vehicle classes.
The premium ceiling is determined by the Commission with regard to stakeholder submissions and independent actuarial advice. The ceiling incorporates a margin which allows individual insurers the capacity to be competitive. The floor is based on more optimistic assumptions of trends but ensures premiums are sufficient to meet claims and associated costs so the scheme remains viable.
By introducing amendments in October 2000 offering insurers the opportunity to set premiums within a floor and ceiling limit, the Government expected to see competitive pricing amongst insurers, which would benefit motor vehicle owners.
While there has been some competition since October 2000, the average difference for Class 1(cars and station wagons) premiums over the last ten quarters was only $4, and for the last three consecutive quarters, all six insurers have filed at the ceiling. While motor vehicle owners have the option of changing insurers, for some time now, there has been little price incentive to do so.
There are many arguments as to why competition has weakened over the last two years, including the global economic downturn and new prudential requirements putting capital pressures on insurers with consequential effects on the market. Arguably one of the main reasons why the CTP insurance market has failed to see effective competition is the added cost pressures associated with intermediary commissions.
Motor vehicle dealer network
Some insurers have developed strong links with motor vehicle dealers as fundamental to maintaining market share. Motor vehicle dealers in exclusive relationships with certain insurers, offer buyers the convenience of organising CTP insurance and registration for their new vehicle at the dealership. In return, these dealers have been paid commissions on any new business generated for the insurer as well as trailing commissions for each year the CTP policy remains with the insurer.
Other inducements to motor vehicle dealers, such as discounts on commercial insurance have become common place. All these aspects translate to higher costs and are passed to all motor vehicle owners in the form of higher premiums.
Competition is also hindered by consumer lack of awareness that they have a choice in their CTP insurer. Often, people buying new cars are not aware the dealer has nominated an insurer on their behalf. Under the current scheme, the process is passive, with the motor vehicle owner not inclined to actively research CTP insurers or premium prices. If the motor vehicle owner lacks the awareness, interest or access to information to change CTP insurer, when the subsequent renewal arrives, they will simply renew with the same insurer.
From a competitive perspective, these motor vehicle dealer arrangements are causing significant barriers to new entrants to the scheme or those insurers wanting to build market share.
It is of note, other than New South Wales, no jurisdiction pays any form of commission on CTP.
Reducing delivery costs
On 8 June 2010, the Treasurer announced, “The Government will legislate to ban the payment of commissions associated with CTP insurance effective from 1 October this year.”
The Treasurer also announced that from 1 October 2010, the Government will remove the $4 HIH surcharge included in the Nominal Defendant levy. The HIH surcharge was introduced in 2001 to help fund the liabilities that transferred to the Nominal Defendant following the collapse of the HIH group.
Through these changes, premiums were anticipated to fall by as much as $24.
In addition to these amendments, the Government is looking to improve the information already available on CTP insurance including enhancing the registration renewal package, amending forms and improving the information available on the websites of the Motor Accident Insurance Commission and the Department of Transport and Main Roads.
The objective is to create an environment more conducive to price competition. It is pleasing to note that the filings for the 1 October 2010 quarter will have the first signs of differential pricing, albeit only a small difference (Allianz $5 lower for Class 1 and NRMA $10 lower for Class 4 vehicles).
Looking forward
The Commission will continue to keep the scheme under review, carefully monitoring price competition and the response to consumer choice initiatives.
Last reviewed 29 November 2012
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