Third party car insurance continues to be priced beyond the means of millions of ordinary vehicle owners, with the result that many South Africans face serious financial consequences after a car collision where they were at fault—just because they could not afford to buy cover.
That’s according to Alex Thomson, co-founder at Naked, an insurance startup that uses smart automation and artificial intelligence (AI) to make insurance more accessible to consumers. Thomson points out that the law in most countries around the world makes it mandatory for every vehicle owner to buy an insurance product that covers their liability if they cause damage to others.
Yet such cover is not compulsory in South Africa; according to the AA, there are “12-million cars in SA, of which 70% are uninsured.” When a driver without insurance is involved in a collision where he or she is at fault, insurance companies representing the other vehicle’s owner may pursue legal action to recover the cost of the damages.
“In some cases, an insurance company will aim to attach an at-fault driver’s assets,” says Thomson. “But in South Africa it’s more common for them to enter into a repayment agreement, whereby they take a significant portion of the driver’s disposable income at the end of each month, often for many years. This can be ruinous for low or mid-income earners and their families, which is why car insurance is a legal requirement for every vehicle on the road in many countries.”
This raises the question of why South Africa’s insurance industry has not yet come to market with an attractive solution for the millions of uninsured vehicles on the road. “The answer is simple,” says Thomson. “Most South African insurers have massive overheads as a result of their manual business processes, reliance on physical infrastructure such as call centres, legacy systems and other overheads.”
Thomson says that most insurers selling car insurance spend 25.9% of the monthly premium (FSB stats) on administration costs for a comprehensive policy. That translates into R181 of the R700 an average driver might pay per month for comprehensive insurance for a typical car.
“When the insurer offers third-party only insurance, its monthly costs to service the policy are not much different, translating into a premium that is disproportionately high for the risk covered by a basic product. Traditional insurers will struggle to offer standalone third-party liability insurance for less than R200 per month,” says Thomson.
“That’s why most insurers do not market third-party only insurance and why consumers seldom buy it on a standalone basis. If you have cover for other vehicles or your home with the same insurer, it can spread this admin cost across your portfolio, but this does not help most of the low-income earners who currently cannot afford car insurance.”
Thomson says that technology is helping to solve this problem by stripping costs such as legacy systems, broker fees, and call centres out of insurance administration. Naked (www.naked.insure), for example, uses an automated system to provide final car insurance quotes in as little as 90 seconds, and an insurance policy contract in just three minutes.
“Without manual processes, people can buy a third-party policy from as little as R40 a month from our app or website, giving them R5million liability cover without any excess. Claims, changes and cancellations are also done online, without human intervention,” says Thomson. “The cost-saving is passed on directly to customers through lower premiums. That’s a game-changer for many South African consumers who could not afford cover up until now.”