Written by: Petr Vykoukal (www.penize.cz)
Photo by: Vladimír Weiss
A car is something many of us can’t imagine living without. However, their number on the roads jeopardizes the safety of both motorists and those involved in roadway operations. This is why a good insurance policy should pay off for you.
The two main auto insurance products are compulsory liability and collision insurance. Collision insurance covers damages inflicted on the injured party’s car, while compulsory liability insurance is for other persons on the roadway. Due to the number of cars on Czech roads, this is a very attractive business. Last year CZK 10.3 billion were collected on collision insurance premiums. This sum has been stagnant for several years, but the amount of paid-out insurance claims has been rising alarmingly. While in 1999, according to statistics provided by the Czech Association of Insurers, compensation for damages reached CZK 6.16 billion, one year later this figure was CZK 7.94 billion, and last year it was up to CZK 9.43 billion. The main reason for this phenomenon is the rapidly rising number of insured incidents – there were under 200,000 of them in 1999, but 366,000 last year.
In terms of premiums collected, compulsory liability insurance is even more lucrative. Last year nearly CZK 16 billion were spent on such policies (with 5.2 million insured vehicles), two billion more than in 2000. Here too the amount of paid-out settlements is rising, but not as dramatically as in the case of collision insurance. Last year insurers paid out around CZK 7.2 billion, with the average settlement for damage remaining the same, at CZK 24,480. However, because of the amount of insurance coverage (often up to CZK 50 million), insurers must build up large reserves for this insurance. Such reserves are mainly used for damages to health, which usually mean long-term payments for treatment, various annuities, compensation for lost wages, and so on.
Status quo continues
The compulsory liability insurance system has undergone great changes in recent years. It was run by Česká pojišťovna until 1999, after which competition began on the market, but with regulated prices. Full deregulation came only this year, and it will appear in prices next year. Deregulation led mainly to higher rates, which the insurers nearly unanimously raised by 10%, on average. This increase was most notable in premiums for trucks, which doubled (or more) with many insurers. According to Miloš Velíšek, the auto insurance sector manager for Allianz, the main reason for this is the large amount of heavy damages caused by trucks in other countries. The only insurer not to change its rates at all is Česká podnikatelská pojišťovna (ČPP). After last year’s rates were published, the Czech Insurers’ Office (an institution that brings together insurers providing compulsory liability insurance) began looking into ČPP’s rates in November, issuing a press release to the effect that ČPP’s behavior could threaten the stability of the compulsory liability insurance system. However, Jiří Borský, marketing director for ČPP, believes that such concerns are inappropriate. “Our insurance company focuses mainly on older people from villages and small towns and lower-income groups. These people use their cars much less than do others, and they nearly never take them out of the country, so the number of accidents they cause is lower, which allows us to offer them lower rates than those of the competition,” he explains. The rise in compulsory liability insurance rates will continue in the future; due mainly to inflation, and next year to legislative changes governing the amount of compensation harming health, which will grow several-fold compared to now. Other changes, primarily in the rate structure, could appear in the following years. “The system won’t change too much, at least for the next two years. We expect that there will then be sufficient room for more detailed segmentation,” Velíšek says.
Making space for new products
Many products associated with cars are still lacking in the Czech Republic. So-called gap insurance is one such product that only appeared recently. Gap insurance will be especially appreciated by people who lease their cars. In the event that the car is lost (stolen or totaled), there is a huge difference between the insurer’s compensation and the residual value of the car in the leasing company’s books (the car’s market price declines faster than the book value). So often the client loses his car and still has to pay what he owes to the leasing company. Gap insurance shifts this risk to the insurer. So far, this product is offered by MAI CEE, a brokerage company, through its dealers.
According to Ivan Špirakus of Portfolio Alfa, a brokerage firm, another insurance product still missing on the Czech market is the option of buying an extended guarantee on a car. This product is currently offered only by dealers of some car brands. Although it might seem that carmakers should offer this service, it is an insurance product. The insurer sets the premiums according to the frequency of breakdowns for a given brand (in other words, according to the probability that repairs – insurance claims – will occur). In many countries one can buy extended guarantees not only for future car repairs, but also for many other products.
In the coming years the insurance market will undergo definite changes. Unfortunately, it is highly probable that every driver will wind up paying more.
|Competitive coverage for cars
COMPULSORY liability insurance is an inseparable part of car ownership. Insurers currently compete not only in their rates, but also in additional services. With some you can get auto service discounts, while others offer assistance services, including paid towing, etc. The element that will slow down the competitive battle is the bonus and surcharge system. For example, you can already enjoy a 30% discount with Kooperativa if you have not had any damage in the last three years. Most of the insurers use this system. Conversely, if you have a lot of accidents or maybe one big one, a surcharge will be applied, which could increase your premiums by up to 150%. However, such a client can go over to a competitor, since the insurers do not yet exchange information on their clients. A disadvantage of new deregulation are limits on insurance claims. The law requires that settlements amount to at least CZK 5 million for property damage and CZK 18 million for personal injury. Most insurers offer these sums as the basic variant and go on to offer products with coverage for damages to 30-50 millions of crowns (or more) for both types of damages. Higher coverage costs only a few hundred crowns extra, because the probability of the damages exceeding the legally stipulated limits is minimal. The solution could be unlimited compulsory liability insurance, but that would mean more expensive reinsurance for insurers and higher insurance premiums charged to clients.Insuring large car fleets doesn’t pay
AS OPPOSED TO its companion – compulsory liability insurance – collision insurance is much less frequently used. The number of insured cars is estimated at 10-15% of the total number of cars on Czech roads. There are several reasons for such low interest in collision insurance. For older cars it often costs so much compared to the car’s value that owners aren’t interested in it. According to Ivan Špirakus of Portfolio Alfa, wealthy clients are surprisingly uninterested in this product, mainly insuring their cars only against theft.
Fleet size can be a major reason for some large companies not buying collision insurance. “With four to five hundred cars in a fleet, a company becomes a self-insurer, but it must have sufficient self-discipline to create reserves against future damages,” Špirakus says. “However, the calculation depends on many factors, mainly the number of vehicles, their purchase prices, their age and type – attractiveness to thieves, and the number of accidents, for which you need statistics covering several years,” he adds.
Collision insurance is developing towards a combined product, together with compulsory liability insurance and the options of various supplemental insurance policies: on windshields, luggage, passenger injury, replacement vehicle rental during breakdowns, etc.