No claim discount for third party motor insurance, a new directive in Ghana

A motor insurance policy is legally mandatory if a person wants to drive on any road and not face penalties. The Motor Vehicles Act, 1958 mandates every vehicle plying on Ghanaian roads to have at least, a valid third party liability policy.

The policy covers financial liability if the insured gets involve in a vehicular accident and harm any third party or property. Third party policy covers bodily injury or death of the third party arising out of an accident involving an insured vehicle and damage caused to any third party property.

In both instances, the insured will be financially liable for compensating the aggrieved third party for the damages caused. A third party liability policy covers this financial obligation and settles the compensation payable to third parties in case of any accidental injury or damage.

Insurance premiums are usually fixed by the National Insurance Commission (NIC). NIC is the apex governing body of the insurance sector and is entrusted with the task of fixing third party policy premiums. Motor insurance premium rates in Ghana depend on components such as the cubic capacity of the motor vehicle, year of manufacture, among others. NIC has been formulating and notifying the third party premium rates to general insurers offering motor insurance policies. These premium rates are usually modified and the changed rates are communicated to the concerned insurance companies.

Insurance Market Imperfections
Under free market conditions, prices are determined almost exclusively by the forces of supply and demand. Any shift in one of these results in a price change that signals a corresponding shift in the other. A market failure results when prices cannot achieve equilibrium because of market distortions (for example, two motor third party vehicles with the same year of manufacture, same cubic capacity, same usage, but paying different insurance premiums) that restrict premium rate.

In Ghana, the market penetration for the insurance market is below 2%. However, there are more than twenty-five general insurers. This has created unhealthy competition among general insurance companies. Some insurers have resulted in undercutting or under-pricing insurance premiums so they can win businesses. Nevertheless, these companies are struggling to pay insurance claims, hence, tarnishing the image of insurance companies in Ghana.

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When trying to do an insurance price comparison, it helps to have some tips on finding differences. We hear about it all the time. For instance, one person who seems to have all the same qualities as you; the same type of car, same kind of home, but paying much less or much more in insurance. It might make you wonder that if all things are the same, what makes one insurance company more expensive or cheaper than another.

THE INSURANCE ACT 2006, ACT 724
The Section 2 of the Insurance Act, 2006 spells out the objective and functions of the National Insurance Commission. The objective of the Commission is to ensure effective administration, supervision, regulation, monitoring, and control of the business of insurance to protect policyholders and the insurance industry other than health insurance. The Section 204 of Act 724 also mandates the Commission to issue Market Conduct Rules to bring sanity into the insurance industry.

Market conduct refers to the pricing and promotion strategies followed by the players in the market in terms of their aims, objectives and decision-making process. Market conduct is, in fact, driven by regulations and policies and these policies in a way decide marketperformance.
It is by these powers that the Commission has hereby introduced the “Enhanced No Claim Discount” for all Third Party Motor Insurance.

THE NEW DIRECTIVE
In the year 2014, the policy of “No Premium, No Cover” was introduced by NIC. The policy required insurance firms to collect premiums upfront before providing insurance cover. It also implied that insurance companies will no longer be required to sell insurance products on credit to customers. The aim of this policy was to enable insurance companies mobilise enough funds in order to honour insurance claims promptly.

This year too, the Commission has made some changes in the third party premium rate, and has issued new tariff which takes effect September 30, 2018.

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With this new directive, a policyholder who qualifies for No Claim Discount shall no longer enjoy reduced premium rates. This No Claim Discount is limited to both motor third party renewals and new businesses. For example, an owner of a private car who wants to purchase a third party Motor Insurance will pay a premium, not less than Ghc370.00, whether it is renewal or new business. In other words, third party Motor Insurance will no longer enjoy “No Claim Discount”. This will prevent insurers from giving unnecessary discount to businesses just to win that business on third party motor insurance.

However, policyholders of third party Motor Insurance will enjoy all the benefits under the third party Motor Insurance in addition to either increased personal accident cover, or increased property damage cover or bodily injury cover for third parties, or vouchers to purchase Life Insurance products.

LOOPHOLE IN THE NEW DIRECTIVE
Unfortunately, this new directive didn’t say anything about Fleet Discount. Fleet pricing is a special discount price offered by an insurer to an insured who have multiple cars under one motor insurance policy. Many types of companies make frequent use of fleet pricing or discount in insurance, whether it is a car rental service or commercial vehicles for official company.

With this new directive abolishing No Claim Discount, some insurers may use the fleet discount as a means to reduce insurance premiums for multiple cars under one motor insurance policy. NIC should monitor that aspect too.

CONCLUSION
Any general insurance company in Ghana shall no longer grant a reduction in premium on condition that a policyholder did not make a claim. This will in effect make all general insurers in the country charge similar premiums for third party Motor Insurance. There will also be sanity in the insurance industry in Ghana.

Writer: Gideon Sarfo

Email Address: sarfo.gideon03@yahoo.com

Place of work: Tri-Star Insurance Services Gh. Ltd.

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