Insurance is an integral part of any economy. While sometimes its economic importance is somewhat hidden and hardly comprehensible by the masses, it guarantees the undisturbed operations of both corporations and individuals. The use of insurance varies across sectors, but perhaps individuals or households come in contact with car insurance most: be it a voluntary motor insurance, also known as CASCO or mandatory state requirement of CMTPL. That is why the affordability of these insurance types for most of the population is absolutely paramount.
Some years back, Federal Insurance Office established by US Department of Treasury, developed a new and rather conflicting index1 that measured the affordability of insurance. The main objective of the mentioned initiative was to monitor the prices of insurance in traditionally underserved communities: minorities and low- or moderate- income individuals. The study tackled the situation in both mandatory and voluntary automobile insurance markets.
This article discusses the opportunities and implications brought by the use of such an index locally. Currently having limitations of available data for longitudinal analysis, the rationale behind a functioning system would be disclosed in detail.
Initially affordability index was set to be the fraction of average expenditure on auto insurance over median household income. The former can include mandatory or voluntary third-party liability payments, personal injury coverages, etc. The first section of the analysis discusses the relationship with CMTPL insurance.
CMTPL premiums are regulated in Armenia by a governing body (Armenian Motor Insurers Bureau) and insurance firms have little to no power over the pricing strategy. Some of the adjusting metrics for the premium are type of the vehicle, its purpose of use, engine power, as well as the risk level of registered drivers and the period of contract.
The median income is not available, so the average gross income was taken. This may skew the results slightly, as median income disregards strong outliers (significantly less or more income), but average figure accounts for them. For the past 4 years, CMTPL premium was roughly 1% of a person’s annual income. Alone this figure tells little to its user, it should be accompanied with other metrics to truly reflect the affordability. Although, this is a promising starting point for tracking changes in CMTPL insurance market.
|Year||Monthly Average Gross Income (AMD)||Average CMTPL Premium (AMD)||CMTPL Affordability Index on Annual Income|
The initial study focused more on affordability of voluntary motor insurance coverages, as these are the products people have a choice whether to buy or not. Compulsory insurance is a sunk cost for households as the requirement leaves no room for their judgement regarding their purchase decision. In Armenia voluntary motor insurance coverages include CASCO packages for the damage of one’s own vehicle, voluntary motor liability insurance for increasing the limits of CMTPL, personal injury protection for the passengers of one’s own vehicle and other significantly less popular products. In the scope of this research, only the affordability of CASCO insurance will be examined.
There is no public information on the average premiums in the market of voluntary motor insurance, as well as how many vehicles are insured. For the sake of this article, a benchmarking was used: it is assumed that in every 50 cars with CMTPL insurance 1 also has CASCO.
In the discussed 4 years, it is clearly visible that year-after-year CASCO insurance becomes less affordable. In other words, insurance premiums increase more rapidly than the average income. The drivers of this phenomenon could be rising loss ratios of insurance firms that made them increase their prices, or they conclude riskier contracts with higher rates, etc.
|Year||Monthly Average Gross Income (AMD)||Average CASCO Premium (AMD)||CASCO Affordability Index on Annual Income|
The same figure for the origin country of the index, United States is around 1.36% (discussed states were CA, FL, IL, NY). Surely, auto insurance is a smaller portion of a person’s income in the US, because of higher wages. At the same time, an American annually spends over $1,030-1,750 varying by state to purchase an insurance for their vehicles that by no means are comparable with prices locally. Therefore, comparing the affordability index in Armenia and overseas has little economic meaning.
Although, measuring affordability with a single index is a rather compelling idea, it does not truly meet its initial purpose as there is no regard for socioeconomic factors to provide further context. Therefore, given the indicator implications and limitations, such as use of judgement and benchmarking for refining available data, affordability index should be dealt with caution. It is more suitable for monitoring the changes in the industry that could potentially alert for deeper issues.