Consumers Association of Penang

Giving voice to the little people...since 1970

Bank Negara's basic motor cover framework: What's wrong and what's the alternative

Bank Negara Malaysia (BNM) invited public comments on its proposed Third Party Bodily Injury and Death Benefits (TPBID) which is going to replace the third-party motor insurance. Below we reproduce the comments submitted to BNM by the Consumers Association of Penang (CAP).
 

1. The Problems and Issues with the current scheme as identified by BNM
  •  Inadequate access to third party insurance cover, especially for old and commercial vehicles.
  •  Lengthy claims settlement process
  •  Premiums which have not been revised since 1978
  •  Insurers reluctant to offer 3rd party insurance cover as premiums are insufficient.
  •  Risk of accident victims not receiving adequate or any compensation
2. The problems and issues with the current scheme as identified by CAP
  •  Delay in claims settlement
  •  Long and tedious court process
  •  Insurers willfully refuse to resolve clear cases, and delay payments
  •  Bureaucracy in obtaining supporting documents from police, hospitals, etc
  •  Insurers refusing to offer 3rd party insurance cover without loading and other add-ons
  •  Leakages in the form of enlarged claims by workshops, replacement of inferior and imitation spare parts
  •  A large portion of premiums paid go to insurance companies and lawyers, and not to the victims
  •  Failure to deal with lifelong care and rehabilitation for persons with serious injuries
3. A closer look at the problems with the current system

It is undeniable that the current system for compensation of victims of motor vehicle accidents (MVAs) has failed. Its failure lies mainly in not delivering adequate remedy to persons injured as a result of such accidents, efficiently and equitably.

The current system is based on the principle of Corrective Justice, i.e. if you are at fault, you pay. Claims for compensation for personal injury or any other loss occasioned by motor vehicle accidents are made by instituting proceedings in court. The courts apply principles of common law negligence in determining fault and compensation. Compensation is paid out by insurance companies out of funds derived from premiums paid under compulsory third party risks insurance policies.

In fault-based litigation, not every person injured in an accident receives compensation. Furthermore, regardless of the severity of injuries or extent of loss, claimants usually have to wait for a considerable period of time and spend substantial amounts of money before a final determination of their rights and award of compensation. Such delay may mean that many are unable to speedily return to gainful employment.

Added to that is the difficulty and uncertainty endured by the victim in proving liability and damage. In this manner, the victim suffers although he/she may not be at fault.

There is also no proper guideline for awards of damages in certain categories such as those for pain and suffering, in which cases the quantum of damages vary from case to case.

Long term care and rehabilitation needed for victims of serious injuries is also not adequately addressed under the current system. What is provided for are only lump sum payments, which are clearly geared towards merely paying for their medical expenses and not towards assisting the injured persons in the long term, and towards returning gainfully to society.

Furthermore, because it is not a comprehensive scheme, it does not deal with accident prevention strategies. The Road Safety Department has made efforts, but accident and death rates have not reduced.

There is the question of where our insurance premium goes to and how much we get in return. According to our survey, for every RM1 premium, less than 50 sen goes back to the victim. The other half goes to commissions (11%), management expenses (20%), profits and legal expenses.

The system as it exists is untenable. Insurance companies say that they cannot run it anymore. As BNM pointed out, many insurance companies refuse to offer third party coverage, and many persons are forced to obtain their insurance coverage from MMIP, which is more costly. Many too remain uninsured, and they, being unprotected, are the persons most at risk.

4. Does the BNM proposed TPBID scheme sufficiently address all the issues raised?    

The answer is certainly NO.

BNM’s proposal is in essence no different from current system. It is focused on:
  •  Ensuring everyone has basic insurance coverage
  •  Compensation for the victim on proving fault
  •  Savings for the insurance business
It is our contention that the problems associated with TPBID claims all boil down to the principle behind the current and proposed new scheme – both are fault based schemes. In fault based schemes the entire focus is on determining the party at fault. Time, effort and expense is devoted towards this point. In all likelihood, it will still involve the same delays, bureaucracy and issues as the current scheme.

BNM does not propose a comprehensive solution to the problems at hand, a solution that ensures all persons are covered under the scheme, provides not only compensation but also life long care and rehabilitation for the seriously injured, and includes accident prevention strategies.

Merely looking at the proposal for a RM2 million ceiling for claims under the new scheme, there are issues:
  •  This figure is misleading, and what must be known are the individual caps for different branches of claims i.e loss of earnings, general damages, nursing care, medical expenses etc. It may be likely that the individual caps are lower. Cases where individuals make claims from all branches are few and far between. In all likelihood the figure of RM2 million will never be reached by any claim.
  •  BNM says that 90% of all claims are below RM2 million. An insurance scheme must cover everyone, and not merely 90% of the population. What happens to the 10% whose claims may be outside the RM2 million cap, or more precisely over and above the individual caps for each category of damages? Which leads to the next issue:
  •  If a person’s claim or rather if the amount awarded to the claimant is more than the capped amount, does it mean that the claimant is required to then to proceed to enforce the judgment against the other party for the balance sum? If so, this will defeat the entire purpose of reform.
5. CAP’s proposal

nflWe are convinced that in view of the serious weaknesses in the current system and in the proposal by BNM, that the entire fault based system has to go. Precious time, effort and money is being wasted on determining who is liable and who is not.

We must move away from Corrective Justice to Distributive Justice, from determination of fault to compensation and rehabilitation to all. There must be a paradigm shift – from the question of culpability to the question of compensation, rehabilitation and welfare. It is the responsibility of society to assist persons injured from motor vehicle accidents and allow them to be able to return and contribute to society. Our failure to achieve this is also an economic cost to the country.

CAP firmly believes that the revamp of the current system for compensation for victims of motor vehicle accidents and the introduction of a no fault system is a manner in which justice and equality can be achieved for all persons who have suffered injury or loss as a result of motor vehicle accidents.

CAP had previously submitted a memorandum on our proposal for a no-fault system to BNM. We stand by that proposal. Reform should not be half-hearted, but aimed at resolving the problems existent in the system.

In fact no-fault proposals have been made over the years:
  •  In 1995, the late Tan Sri Dato’ Harun Hashim, a former Supreme Court judge proposed the introduction of a no-fault scheme for claims in relation to bodily injury and death as a result of motor vehicle accidents.
  •  In August 2007, the Attorney General's Chambers issued a Preliminary Issue Paper proposing that a No Fault Liability Scheme (NFL) be introduced. Nothing came out of that proposal.
One proposal has stayed and remained successful:  Social Security Organization (SOCSO) was established in 1971 under the Human Resources Ministry to implement and administer the social security schemes under the Employees' Social Security Act 1969, i.e  the Employment Injury Insurance Scheme and the Invalidity Pension Scheme. Under this scheme, workers are protected in the event of industrial accidents including accidents occurring while working, occupational diseases, invalidity or death due to any cause. In essence, the SOCSO scheme is a no-fault scheme providing compensation to workers injured in work-related accidents.

There is therefore, in our opinion, no longer any need to debate on the superiorities of each scheme. What we need is a roadmap towards the implementation of a No-Fault Scheme in Malaysia.

6. CAP’s proposal for a no-fault liability scheme

CAP’s proposal is based on the following guiding principles:
  •  Adequate, efficient and quick compensation for victims of MVAs without the need for litigation or dispute resolution on  the issue of fault;
  •  Rehabilitation and life long care for victims with serious injuries and support for dependants of deceased victims;
  •  Effective accident prevention strategies;
  •  Low administrative costs so that more funds are available for road accident victims.
In our memorandum, CAP proposed that Malaysia emulates the model practiced in Victoria, Australia and run by the Transport Accident Commission.

6.1 Administration

A specific piece of legislation must be introduced to regulate the scheme, providing for all matters therein. An state-owned corporation or statutory body, along the lines of SOCSO must be set up to run the entire no-fault scheme. A corporation is preferred to a government agency, as while the latter may eventually be beset with bureaucracy, the former can function independently while being able to operate as a profitable entity in the long run. At the same time, being fully owned by the Government, it would be expected to prioritise social security and the aims of the scheme, as opposed to mere profits.

CAP is in favour of the government coming on board, and that is what CAP has proposed in relation to no-fault. The insurance industry has been left to its own for so long, that now the public and the government is being held to ransom by it. There is no need for insurers to be involved in motor coverage if it is not their cup of tea. A perusal of the no-fault schemes in Australia and New Zealand will show that insurers are not involved at all in their set up.

SOCSO was first set up as a government department in 1971. The in 1985, it became a statutory body.

Just as in the TAC, only the initial outlay will be from the government and that the new corporation has to subsequently run on the premiums and investment.

CAP has always maintained that SOCSO is an ideal example of how a state owned corporation should work. According to SOCSO’s Activity Report 2007, SOCSO has total assets of over RM15 billion. The increase in investments from 2006 to 2007 was due to a rise in SOCSO’s Total Funds and its positive return on investments.

6.2 Funding

Funding for the no-fault scheme could come from existing insurance third party premiums. As legal and administrative fees of insurance companies can be expected to go down as there will no longer be a need to prove fault, and there will no longer be any commissions to agents, existing premiums may suffice.

In addition, it may not be burdensome to require drivers to contribute to the scheme, as a payment to be made together with payment for vehicle registration or driving licence renewal. CAP has proposed an average flat rate of RM50 per year. In fact  the late Tan Sri Dato’ Harun Hashim himself proposed such a rate, way back in 1995.

Receipt and administration of payment could follow the SOCSO example, via banks or post offices or other authorized agents.  

In addition, funding may also come from SOCSO. As SOCSO deals with claims by workers for injuries occurring during the course of employment, including travelling to and from the place of work, there will be an overlap where workers suffer injury in a motor vehicle accident during the course of their employment. We propose that all cases of injuries as a result of MVA come under the purview of the NFL scheme, including those currently covered by SOCSO. That being the case, a portion of the contribution made by employees and employers to SOCSO can be allocated for the NFL scheme.

At the initial stages, the initial outlay would have to come from the Government. However, the statutory corporation could later on fund claims from investment returns on reserves,.

An NFL scheme would save time and money as accident cases would no longer be taken to court and affected persons would not face delays in payments from insurance companies. The Government and insurers would also not have to fork out large amounts for interest on judgment sums, which would normally be due when delays occur.

To ensure the long term viability of the scheme, there should be regular actuarial review of rates under the scheme as well as the scale of benefits based on loss experience and inflation rate.

6.3 Road Safety and Accident Prevention

The no-fault scheme will be futile if effective steps are not taken to promote road safety and prevent accidents. In the Malaysian context, this will include changing mindsets, as generally a large number of Malaysian drivers (and pedestrians) disregard road safety requirements, laws and regulations.

Current campaigns to promote road safety may not be effective enough, and tougher campaigns, coupled with proper enforcement of the law, must be carried out to ensure that road accidents are prevented, and reduced.

A look at SOCSO’s Activity Report 2007 will show that the number of accidents reported throughout 2007 decline by 3.4%, as a result of initiatives implemented to reduce the number of accidents, such as seminars, campaigns, periodic inspection and enforcement, collaboration with government bodies, employer associations and unions to increase awareness about safety and health at the workplace.

Accident prevention is key to the long term viability of a no-fault scheme, as has not only been recognized by SOCSO, but also by the TAC in Victoria. As such, campaigns must aim to increase awareness and change behavior, with a view to reducing road accidents and injuries.

6.4 Viability of the no-fault scheme

When the accident compensation scheme under TAC was introduced in 1987, it had an immediate impact – there was improved viability and solvency and, among others, the number of claims were reduced.

The accident compensation scheme has been and continues to be successful because it focuses on:
  •  Accident prevention and claim frequency reduction
  •  Effective claims management with health and legal support and rehabilitation
  •  Prudent financial and investment management
Accident prevention is key to the scheme’s long term scheme viability. There has been a  reduction of more than 38000 claims over 10 years, with savings of more than AUD $1 billion. The number of fatalities on Victorian roads has reduced dramatically, from 776 reported in 1987 to 337 in 2006.

This can also be achieved if pro-active steps are taken to improve road conditions vehicle safety in addition to hard-hitting and emotive road safety campaigns.  

The viability of the scheme in the long terms also depends on the delivery of good service to crash survivors – service does not only mean compensation but also caring for injured persons in their return to health, work and independence.

To ensure it remains a long-term compensation scheme, the TAC uses its funds fairly and responsibly. This ensures the TAC is able to meet the needs of seriously injured people who need lifetime care.

Furthermore, TAC’s legal services are not outsourced but in-house. Claims related legal services were in-sourced in 2004. This helps TAC claims staff make the correct or preferable decision and assists to resolve disputes and litigation.

CAP is of the view that all these must be emulated in the creation of a viable, functional and effective no-fault system in Malaysia.

7. Specific Issues raised by BNM

In the following paragraphs, we will examine the issues raised in BNM’s Discussion Paper and provide our responses as to how a no-fault scheme will resolve these issues, in contrast with the half-reform currently being proposed.

7.1 ISSUE: Inadequate access to 3rd party insurance cover; large number obtain cover from MMIP; many insurers selective in offering 3rd party insurance cover; many vehicles uninsured

CAP’S RESPONSE:

In the No-fault scheme proposed by CAP, all vehicles registered in Malaysia must be covered, as long as the accident occurs in Malaysia. Benefits should be payable to persons injured in an accident as a driver, passenger, pedestrian, motorcyclist or cyclist.

There will therefore no longer be any issue of uninsured vehicles. The question of paying commissions etc to agents will also not arise.

As for tariffs not being revised, we propose that tariffs remain the same, and in addition that every vehicle registered be required to pay a sum of RM50 per year together with vehicle registration, to be channeled to the corporation that runs the no fault scheme. Considering that there are 18 million vehicles in the country, this should bring in an additional RM900 million.

7.2 ISSUE: Lengthy claims settlement process

Involvement of multiple parties

Between 1 to 3 years

Reasons for delay – acquisition of documents, processing time, time taken to come to reasonable compensation, disputes, court case


CAP’S RESPONSE:

With a no-fault scheme, first of all there will no longer exist the need to determine fault. As a result, the process of documentation will become less complicated. The possibility of persons using official processes to obtain reports in their favour (read corruption) will  reduce greatly. There will also be reduced opportunity for interference by third parties and agents.

Within a no-fault scheme as proposed by CAP, the corporation  or body running the scheme will have to investigate and verify claims, and to assess compensation and manner of payment. There will no longer be a need for lawyers, adjusters and the like, except for the in house legal and technical support staff.

As perusal of SOCSO’s client charter will show that SOCSO aims to pay:
  •  Temporary Disablement Benefit to injured employees within 7 days after receipt of all completed documents and information.
  •  Permanent Disablement Benefit to injured employees within 14 days receipt of all completed documents and information.
  •  Dependant’s Benefit to dependants within 14 days after receipt of all completed documents and information.
  •  To pay Funeral Benefit to the eligible beneficiaries within 3 days after receipt of all completed documents and information.
  •  To pay Invalidity Pension to eligible employees within 14 days after receipt of all completed documents and information.
  •  To pay Survivor’s Pension to dependants within 14 days after receipt of completed documents and information.
These are admirable targets, which a no-fault scheme should emulate and in fact, will be able to emulate, because of the elimination of the need to prove fault.

7.3 ISSUE: PREMIUMS INADEQUATE – HIGH CLAIMS RATIO

BNM has identified two reasons for the increase in the claims ratio -  increasing rate of accidents and leakages. What is being done to address these issues?

Leakages in the system must be addressed. The culture of wanting to make a quick buck together with the lack of enforcement has resulted in this situation where insurers claim they are making losses.

CAP says that the bureaucracy must be cut, leakages identified and removed, and processes made transparent. In CAP’s proposal for a no-fault scheme, the corporation     which runs the scheme  will employ its own adjusters, investigators, legal advisers, to look into claims and reports. Management expenses and commissions will also become a thing of the past.

The Annual Insurance Industry Statistics 2009 show that a total of 30% of premiums earned go towards commissions and management expenses.  This is extremely high.

In contrast, a look at Socso’s Activity Report 2007 shows that Administrative expenditure accounts for only 9.15% in 2006 and 9.79% in 2007 of overall employers and employees contribution.

The high claims ratio can also be reduced if accidents are reduced, road safety is improved and the number of claimants falls. But that cannot be achieved under the current system.

8. Advantages of the NFL system

There are several advantages to replacing the current system with the NFL scheme, along the lines proposed in our Memorandum and above:
  •  The benefit to the public will be tremendous, as persons affected by motor vehicle accidents will be able to obtain funds promptly, and without the delays and hassles which accompany civil suits;
  •  Affected person will also be able to receive prompt medical attention and treatment, especially since hospitals will be guaranteed payment under the scheme;
  •  The cost to the public will not be burdensome, for the convenience and efficiency of the NFL scheme;
  •  The availability of funds for payouts will be guaranteed by law i.e. the governing statute;
  •  There will be full protection for all victims of motor vehicle accidents, including hit and run cases.
  •  The current backlog of cases in the courts will be reduced, and the cost to the public from the use of court’s time and resources will be saved;
  •  The public will save in lawyer fees;
  •  Insurance companies will no longer be burdened with having to set aside funds to meet claims for personal injuries or deaths for periods up to 6 years;
  •  The police’s role will no longer have to be about producing evidence to support a civil suit between parties, and their investigations will be confined to collecting evidence for criminal prosecution against errant drivers only.
9. CONCLUSION

CAP reiterates that it is time for reform of the accident compensation scheme in this country. No-fault is the ideal system that Malaysia should adopt, and it is in fact practiced in many progressive countries.

Malaysia in fact has practiced no fault for almost  40 years in the SOCSO scheme. Human resource and technical support will therefore not be problem, as it is readily available. There is no point in considering other system. The Government should accept the no-fault system and appoint a high-powered committee to work out and set up the mechanism for the introduction of this scheme in Malaysia.

CAP also appeals to BNM to put forward our proposal to the Cabinet. We will be happy to be of further assistance if required.


Dated this 14th day of May 2010.