Rejected by ST Forum
Motor insurance and COE
MOTOR INSURANCE WHAT TO INSURE?
HOW MUCH TO INSURE?
WHY INSURE?
I have noticed market interest in Motor Insurance lately and in response to your reader David Loh (ST, 28th August), I would like to enlighten interested parties as well.
Singapore is the only country in the world that cleverly devised and implemented PARF, COE, PQP, Annual Inspection for licence for the management and use of a motor vehicle. This means there is a fundamental shift in the traditional concept of insurable value.
Insurance is a financial mechanism to handle the loss of an asset or to indemnify as far as possible a person's legal liability eg. in a motor accident resulting in bodily injury to third parties where the driver is probably guilty. In motor insurance, there are 2 parts to the policy viz. Own Damage and Third Party.
Thus, insurance value relates to Own Damage (including loss of vehicle by theft). Third Party limit of liability for private vehicle is unlimited.
For commercial vehicle, a limit of liability for third party property damage is expressed which can be increased if owner feels the limit is inadequate in relation to its organization strength and ability to meet legal liability claims over and above the policy limit which could be only $100,000.00 or $500,000.00.
How much to insure a motor vehicle? It is unfortunate that there is a blurring of interest in deciding value. From the insured's point of view, the question is why should I insure my commercial papers (COE, PARF)? They are not lost and only carries reducing residual values as the vehicle ages. From the insurer's point of view, there is an option not to insure COE and a consideration of 5% discount is given.
Today, this 5% discount is academic and truly out of the premium equation. The reason is that there is no tariff or guide to form a basic model for premium computation. The premium is now a commercial decision and very little underwriting as traditionally practised. Simplistically, a higher premium is charged for a higher sum insured, when there is a base premium eg. a rate. Other data required for a rate would be type of car, insured's occupation, frequency of usage amongst many others. It is an art and not a science - yet!
Because of intense competition, the rating model of the past is used but commercial pressure overrides this prudent approach. Insurers need to survive too and with profit for long term existence. In a claim, market value becomes the single most important parameter to decide settlement options. One danger is the possibility of a constructive total loss which is cited when the sum insured is low and the partial repairs required for a damaged car exceeds this amount. There could be a situation when no claim is given to the insured because of under insurance.
Consumers could negotiate with insurers to insure on a 'Replacement Value Basis' provided a satisfactory premium is given. One method in this basis of insurance is the agreement to insure the physical vehicle only. On insurance principle, consumers cannot insure PARF and COE as these are not lost in the event of an accident. The interest to protect an economic loss does not exist and therefore not insurable. However, for practical reasons, insurers have obliged to consider the holistic approach in arriving at a Market Value ie. incorporating COE element.
Consumers can also seek an agreement with insurers (or through their Agents and Brokers), to define what is "Market Value" as often quoted by insurers. This is to pre-empt any anomalies that may rise because of Singapore's unique licensing environment. Traditionally, a market value is literally how much a buyer would pay for a used car. It would be good for all consumers and insurers to rethink this traditional concept as with the internet economy, many traditional practices have to be re-invented or modified.
With technology, especially Singapore is so wired-up, a vehicle could be tracked to note its usage. With this information, a premium model could be developed as usage commensurates with risk. Physical value of vehicles could be known in an instant with today's infotech environment. Even settlement of claims could be done on the spot with wireless mobile communication.
The answer to valuation of a vehicle can be ascertained with present day's technology. COE is definitely out of the equation. It should not be insured as there is no Insurance Interest!
However, there is insurable interest to insure COE because of its fluctuating monthly value. This is a new insurance called "COE Interest" Insurance. Our advice to consumer is to negotiate with insurers. They are amenable with the right offer of premium and reasonable terms.
HENRY K H TAN
Chartered Insurance Practitioner
H Team Insurance Brokers & Consultants Pte Ltd