It is generally considered as a goal of insurance to make insured pay premiums proportional to the risk they represent. Under a bonus-malus (“BM”) system, which relates to motor third-party liability (“MTPL”) insurance, the premium paid by a policyholder in adjusted according to individual claim history, with “bonus” signifying a reduction in premium given on policy renewal if no claim is made in the previous year and “malus” signifying an increase in the premium if there is a claim in the previous year. Also, BM systems are regarded as a preventive tool for encouraging insured through discounts to improve safety of driving and avoid damages.
After the withdrawal of the much-criticized draft legislative amendments related to introduction of a BM system in Bulgaria in 2018, the new working group, including experts from the Financial Supervision Commission (“FSC”), Ministry of Interior, Ministry of Transport, and Ministry of Information Technology and Communications has recently published a revised draft, which is now open for public discussion.
The Bulgarian MTPL insurance market
According to data announced by the FSC, as of the end of March 2019 the gross written premium income for MTPL insurance accounted for 45% of the insurance premium of non-life insurance; furthermore, the value of the paid MTPL claims amounts to 51% of the whole non-life insurance paid claims. This significant market share clearly demonstrates the importance of the MTPL insurance for Bulgarian insurance companies, namely, for their profitability and financial stability, and for the society as well.
Being a compulsory insurance with a unified scope across the EU, the competition between the companies is not based on modifying the MTPL product, but exclusively on the insurance price (and, to much lesser extent in Bulgaria, on the quality of customer service). The price of the Bulgarian MTPL insurance is one of the lowest in Europe and this fact corresponds to the statistics that Bulgarians are the poorest nation in the EU. However, the low MTPL prices cause serious concerns about the financial stability of the insurance sector, especially after the FSC has warned that the insurance premiums do not cover the costs, which definitely means that premiums must go up. These concerns are further increased by the fact that nearly 63% of the MTPL gross premium income is concentrated in 4 Bulgarian insurers and for 3 of them the MTPL insurance accounts for more than 80% of their total premium income (i.e. the MTPL insurance is nearly the whole of their business).
The current BM proposal
The risks arising out of the low MTPL premiums and their concentration in a few insurers further complicate the task for designing an optimal BM system for Bulgaria, since it is widely regarded as an inherent drawback the BM systems is their potential to increase financial imbalance of an insurer, due to the high concentration of policies in discounted classes causing a decrease in the average premium paid by the insured.
Another national challenge for introduction of a BM system in Bulgaria is that, as required by law, the MTPL insurance primarily relates to the motor vehicle and the insured may not necessarily be the principal driver. To reflect that, the proposal is based on the history of accidents of both the driver and the vehicle owner. One of the most controversial parts of the proposal is the obligation the MTPL insurance policy to include the names of all persons who may drive the vehicle, which is criticized as too restrictive.
In the proposal, the maximum discount of the premium is 25%, while the largest possible increase is 400%. Also, it is provided that premiums will be mandatory adjusted to reflect administrative violations and crimes related to traffic accidents, while it will be up to the insurers to apply the factors related to compensation paid in forming their base insurance premiums, bonuses and maluses according to the company's classification policy.
The Bulgarian BM system is intended to become fully effective as of 1 January 2021.
BM systems vary significantly in Europe and across the world. It looks as certain that the contemplated Bulgarian version will further contribute to the diversity of these systems; however, especially in the light of the national specifics it remains to be seen in practice whether the Bulgarian BM system will rank among the well-functioning systems in the EU.