The Central Bank plans to establish new pricing rules for short-term MTPL policies
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The Central Bank plans to establish new pricing rules for short-term MTPL policies, under which the cost of the contract cannot exceed the price of an annual policy. Taking into account the fact that obligations for this type of insurance do not change, according to experts, this may lead to an increase in the unprofitability of the segment. However, they point to a number of ways that will help mitigate insurers’ losses.
The cost of a short-term MTPL policy (from one day to three months) cannot exceed the price of an annual one. This follows from draft instructions of the Central Bank, posted on the regulator’s website on November 14. Thus, when calculating the cost of a contract, insurers will be required to use a reducing factor for the duration of the contract. The Central Bank does not limit its size. It is assumed that insurance companies themselves will set the coefficient depending on the specifics of the situation for which the policy is issued and the characteristics of the driver. The law on a new type of policy will come into force on March 2, 2024.
The Central Bank believes that thanks to an individual approach to calculation, the price of the policy will be determined taking into account the risk profile of the car owner.
The cost of short insurance will be influenced by other existing coefficients – the driver’s experience and age, break-even coefficient (bonus-malus), territorial coefficient, vehicle power. The National Insurance Information System (NSIS), at the request of insurers, will finalize the automated MTPL information system so that it can take into account one-day policies, promises NSIS General Director Nikolai Galushin.
According to the Bank of Russia, in 2022, passenger car drivers issued 488 thousand three-month policies. Thus, their share does not exceed 15% of the total number of MTPL policies sold. RSA notes that the policy can be useful, in particular, when a citizen is constantly insured and drives a car without accidents and he needs to overtake someone else’s car: “If the insurer knows his client well, the price of a short policy may be insignificant.”
At the same time, a number of experts believe that the new requirements of the Central Bank may lead to an increase in the unprofitability of the segment.
“Insurance companies have always minimized the volume of short-term insurance contracts by applying disproportionate coefficients. For example, a quarterly policy could cost not 0.25 of an annual one, but 0.35 or even 0.5, all other things being equal. This demotivated policyholders to resort to short-term insurance,” explains independent expert Andrei Barkhota. According to him, the Central Bank’s initiative will limit such markups, which could reduce the profitability of the entire MTPL line by 1-2 percentage points.
Insurers have ways to compensate for losses.
First of all, they can make it inconvenient to issue a short policy by creating artificial bureaucratic and actuarial costs, experts say. According to Mr. Barhota, companies can also use “more legal methods,” in particular, providing discounts on comprehensive and packaged insurance offers. This, the expert explains, will make it possible to “recapture unprofitable MTPL by expanding the number of services.” It is also possible to differentiate the coefficients for different types of vehicles.
“With proper pricing, short-term policies may well be profitable,” believes Alexey Yanin, managing director for ratings of insurance and investment companies at Expert RA. According to the expert, the key issue in the new regulation is the establishment of sufficient tariffs and the suppression of possible fraudulent activities. RSA confirms that short-term policies can be used by fraudsters. Insurers, the association explains, for example, are wary of purchasing short policies “to cover accidents that have already occurred.”
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