Details on Mandatory Auto Insurance Payments

According to Article 7 of the RA law on "Mandatory Insurance of Liability Arising from the Use of Automotive Vehicles," the Bureau's council establishes the maximum limits for basic and base insurance premiums annually, as well as allowable values for risk coefficients and the amounts of bonus-malus coefficients. Below is the decision based on the aforementioned provision adopted at the council meeting on December 23, 2021, and registered by the Central Bank of Armenia on January 25, 2022. This information is provided by the Bureau of Auto Insurers of Armenia.

Since the introduction of mandatory liability insurance for the use of automotive vehicles in 2010, the insurance premiums have not changed. During this time, numerous modifications have taken place:

• A direct compensation system has been introduced, allowing for improved service quality by increasing both the compensation amount and the speed of payments.
• A self-regulatory system for accidents involving damages up to 200,000 AMD has been established, enabling quicker settlements in cases of minor damages while leaving potential losses arising from possible frauds to the system.
• The maximum compensation limits have increased tenfold, reaching 18 million AMD for property damages and 33 million AMD for personal injury cases.
• During the operation of the system, bonuses given to insurers with positive histories have significantly exceeded the malus amounts collected from those with negative histories, leading to an imbalance in the Bonus-Malus system.
• Particularly in recent years, the rise in renewal and spare parts prices has resulted in an increase in compensation volumes.

Throughout these years, the pressures on tariff increases derived from the above and other factors have mostly been neutralized due to internal reforms of the system and technological and control improvements. However, in recent years, a decline in service quality within the mandatory insurance sector has been observed (notably, cases of underestimating damages and delays in payments have been recorded).

The Bureau assesses that the current tariffs could lead to disruptions in the provision of insurance services and risks to the financial stability of the system. Actuarial calculations indicate that to ensure the system's stability, the main insurance premium must rise by at least 3,000 AMD annually, risk coefficients need adjustments, and the bonus and malus payments must be balanced. This will ensure the coverage of expenses for insurance companies and the necessary quality of services provided to the public.

The Bureau, having discussed the above and evaluated that an increase in the main insurance premium by 3,000 AMD, along with the adjustment of risk coefficients, could have very sharp adverse impacts, especially for vulnerable group insurers, has decided to change the approach to insurance premium calculation by transitioning from group tariffs to a more equitable individual risk-based insurance premium calculation methodology.

The individual risk-based pricing will exclude the negative situations where, for example, owners of vehicles operated for taxi purposes or vehicles with high horsepower are forced to pay higher insurance premiums simply due to being in that group, regardless of having never had accidents and not being risky, which leads these individuals to often avoid specifying the true purpose of vehicle use, causing negative consequences arising from the provision of false information (premature termination of the contract, refund claims).

Currently, as the first step for this transition, it is necessary to neutralize the application of risk factors based on group characteristics (such as the type of vehicle, engine power, purpose of use, etc.). As a result, from now on, the amounts of the main and base insurance premiums will be identical. Subsequently, by December 31, 2022, new regulations will be adopted, which will imply the individual risk-based premium pricing by each insurance company.

According to the Bureau's decision, the annual upper threshold for the main and base insurance premiums has been established as the base insurance premium stipulated in the last mandatory insurance contract concluded by the insurer for the given vehicle from November 1, 2017, to December 31, 2021, plus 3,000 AMD, while in cases where such a contract is absent, it has been set that a unified threshold of 41,000 AMD must be used. In both cases, when calculating the final amount of the insurance premium, these amounts will be adjusted by the Bonus-Malus class coefficients. As a result of the latter application, the increase for insurers with lower risk and those in the basic group, who make up the majority of the system, will amount to 1,500-3,000 AMD, while for a small number of insurers (15%) in the higher and medium-risk groups, this increase will be more.

It has also been decided to remove the lower limit of the main and base insurance premiums, which will allow for future reductions in existing tariffs as a result of competition. The Bureau has also decided to revise the methodology for applying the Bonus-Malus system based on the principles of balance and fairness.

Thus, henceforth, the differentiation of the number of maluses received for incidents will be based not only on the number of compensations but also on the amount of compensation. Previously, the approach in the mandatory insurance sector faced repeated criticism from consumers, where accidents necessitating different amounts of compensation would lead to an increase in the same 4 malus class. With this change, this increase will be differentiated—up to 100,000 AMD in damages for accidents that account for about 40% of total incidents will receive a more favorable 3 malus class; for damages up to 200,000 AMD, a similar 4 malus class, and for larger accidents, higher malus classes.

Considering the necessity of maintaining balance within the Bonus-Malus system, the amendments either had to reduce the bonuses given to insurers in the lower risk group, or increase the number of malus classes and their coefficients. Therefore, considering the priority of incentivizing the first group and the injustice of reducing bonuses, the number of which, as previously stated, is significantly greater than that of insurers in the higher and medium risk groups, it has been decided to ensure balance at the expense of the latter.

Following the registration of the proposed changes by the Council of the Central Bank, the new regulations will come into effect on February 7, 2022 (with respect to the Bonus-Malus system amendments on March 1, 2022).