Why are CTP Greenslips so expensive?
Having been in the CTP Greenslips game for over 20 years, Phil Lemieux from Marillion Insurance Brokers is well placed to answer the question: “Why are CTP Greenslips so expensive in New South Wales”. “This is a valid question and one that comes up very often and it is important for people to understand why their compulsory third party insurance is priced the way it is.” Phil mentions.
“To answer the question” Phil comments, “is to have an understanding of what macro elements driving the cost on CTP Greenslips generally. Many of these elements are also applicable to the pricing of insurance generally, not necessarily just CTP.
The important elements worth understanding are the following:
1. Benefit levels as legislated under the Compulsory Third Party Scheme in New South Wales (Claims costs)
2. Investment market performance (Investment Returns)
3. Cost of Capital (Profit and Capital Costs
4. Expense structures of participating insurers (Expenses)
These are covered individually as follows:
1. Benefit levels as legislated under the Compulsory Third Party Scheme in New South Wales (Claims Costs)
As governments around the country establish and manage CTP Green slip schemes, policy makers must establish the level of protection that is offered under the scheme and to whom this protection is offered to. The single largest contributor to the cost to the consumer of a compulsory third party insurance is the very important decision as to who gets paid what and when, should an incident giving rise to compensation occur. The greater the benefit structure to injured parties, the higher the cost of claims, the higher the cost of a CTP insurance. Start reducing the benefits applicable to injured parties and your Green slip price comes down. At the highest level, it is as simple as that. Policy makers are always walking that fine line between providing adequate benefit protection to injured parties, while still making CTP affordable for NSW motorists.
2. Investment market performance (investment Returns)
CTP is what insurers call a long tail class of insurance. By long tail, insurers mean policy premium is banked today and claims on that policy can be paid over a long period of time in the future, often over many decades. While insurers await to pay the premiums out in claims, they invest the money in local / global financial markets to earn investment income. These investment returns, all things being equal, are used to subsidise the costs of CTP claims over the period. The higher the investment returns for a given period, the lower the costs of claims for the period and the lower the cost of a compulsory third party insurance for NSW motorists. Conversely, the lower the investment returns, the higher the costs of claims and the higher the price.
3. Cost of Capital
For insurers to operate in Australia, the regulatory regime requires insurers to set aside sufficient capital to meet their obligations into the future. Not unlike big banks where government mandates reserves to be set aside to cover losses in the case of default. This philosophy ensures that insurers are here to pay claims for the long term and offer the necessary protection to policy holders for the duration of their Greenslip policy. This capital is not free. This capital comes at a cost in terms of borrowings from financial markets to meet these minimum capital requirements and these costs are included in the price of a CTP. The higher the cost of capital, the higher the cost of the green slip and conversely so.
4. Expense structures of participating insurers
The insurer’s cost of running their CTP departments including labour, systems and infrastructure is also a factor in determining the price of a ctp insurance. Not all licenced insurers are as efficient as each other. The less efficient, the higher the costs in running the CTP department and the higher the costs apportioned to each greenslip. The more efficient, the less the cost of running the department and the more savings available to NSW motorists. Phil Lemieux comments “For this matter alone, it is important to compare your greenslip price on a routine basis to ensure you are getting the best value for your CTP cover”.