Will a rising tide of traffic accidents impact your insurance premiums?

Malta looks set to break a grim record this year as the number of fatal vehicle crashes is on course to be the highest it has been in decades, while incidents that do not result in death may still lead to life-altering injury and disability. As families are ripped apart and the community laments, it is insurance companies who must foot the ever-increasing bill, raising questions as to whether the number of accidents may impact insurance premiums.

In an effort to understand the link between headlines and bills, BusinessNow.mt reached out to insurance stakeholders to ask if the rising frequency of car crashes could have a nation-wide effect on the price of car insurance.

Keith Tanti, Atlas Insurance’s chief officer responsible for personal insurance operations, explains that a period having more incidents will not necessarily lead to increased premiums, with the impact being “more nuanced than that”.

He says that the relation is not a simple direct one, as apart from frequency one has to look into the severity of such accidents. “You may have a situation of fewer but more severe accidents that will have a worse effect than a lot of small accidents,” he says.

Mr Tanti notes that inflationary pressures, such as increases in the price of vehicle parts and labour the involved in both repair and administration, also have an impact, regardless of the number of crashes.

“Ultimately, however, premiums are calculated on the likelihood of occurrence and severerity of claims based on past experience and future outlook. If road accidents continue to climb, and more so if serious accidents leaving injured parties on our roads continue to soar, insurance fees are far more likely to rise in tandem.”

He adds that that insurance companies have long lobbied for safer streets, calling on drivers to refrain from dangerous driving and on authorities to step up enforcement and better plan roadworks to avoid causing road rage.

“Having fewer accidents benefits everyone,” concludes Mr Tanti. “Drivers, insurers, and the nation.”

These sentiments are echoed by Adrian Galea, director general of the Malta Insurance Association, who reflects that increasing injuries on Maltese roads are a burden on the country health, enforcement, and emergency resources, while causing untold financial losses when traffic flows are brought to a standstill, with business activity following suit.

He insists that authorities must work harder to prevent such incidents, calling for “leadership from those concerned” to improve road safety and curb “the abuse we see on a regular basis on our roads”.

Delving into the mechanics of insurance, Mr Galea explains that insurers collect small sums of money (premiums) from many policyholders to be able to meet the (relatively) larger claims of the few, along with associated costs like those related to distribution, compliance, and administration.

“This can only work thanks to the pooling of premiums and therefore, a large number of similar risks are required for insurance to be financially viable.”

He continues: “A fair premium may only be calculated as long as there is sufficient knowledge and experience about past events. Reality, however, can produce a different set of results, which could produce a shortfall.”

Insurance is a highly regulated sector, incurring significant costs in ensuring compliance with the regulatory environment. Importantly, companies must ensure that they remain solvent at all times, and are obliged to report on this on a regular basis, with health solvency rations being a reassurance to the general public that claims will be met if and when they become due.

Since motor insurance cover extends beyond Malta – as a recent €3 million court judement in Ireland made very clear – insurers need to take into account such court-mandated payouts, that can rise to astronimical amounts.

Mr Galea notes that “while some costs associated with claims could be predicted through experience and information available, a high degree of uncertainty still exists, especially where court judgements are concerned. Insurers crave certainty and it would make much more sense for the sector and especially for the pricing of insurance policies if this uncertainty is minimised through clarity in the legislation.”

Similarly, any controls on the cost side of the equation would contribute towards insurance premium stability.

“Needless to say, an increase in the severity and frequency of claims will only increase the cost side of the equation.”