The factors that determine motor insurance premium in a small island state

Abstract

Purpose: The current factors used for motor insurance in Malta reflects only partially the actual risk involved. The aim of this study is to assess the existing risk factors used for motor insurance and to provide suggestions on how such factors can be improved upon in order to charge a premium that commensurate with the risk.

Design: The objectives of the study were achieved by interviewing personnel who have a strong background in motor insurance in order to analyse their views about the current factors used and what other possible factors can be introduced in order to improve the risk assessment with regards to motor insurance.

Findings: The study reveals that at the moment, most insurers are still using the traditional rating factors, even though they might not necessarily reflect the risk being insured (especially when it comes to the vehicle risk). The study identified that insurers are aware that certain rating factors such as the penalty points and the vehicle grouping can improve the risk identification imposed by bo0th the driver and the vehicle, however, they are not being used by insurers yet.

Conclusion: This study concludes that insurance companies should use more risk factors to determine the motor insurance premium as well as adopt both the penalty points system, telematics insurance as well as adapting the vehicle groupings in order to obtain a better understanding of the risk involved which will affect the premium charged to the drivers.

Value: The study reflects the need for insurers to start introducing new rating factors in order to have a clear distinction between ‘good drivers and bad drivers’, which will ultimately be reflected in the premium charged to the policyholders, without however, unduly complicating the current premium structure. The study recommends that should the proposed rating factors be introduced, it will help insurers to charge a more accurate premium to the policyholders that reflects their risk characteristics, whilst also improve upon their profitability and their competitiveness.