What is CTP (Compulsory Third Part)? How does it work in Armenia?
CTP is the transfer of risk from one subject to another. In case of risk, the insurer, the insurance company compensates to the third part, who was damaged by the insurant. The mechanism is simple: Insurance fees are accumulated and in case of accident, the aggrieved is given a compensation from the accumulated fees. In other words, many pay for the compensation of few.
In Armenia Car Insurance is a new sphere, which has broad aspects of development and expansion. We should mention that currently no insurance company is engaged in life insurance or PAI (Personal Accident Insurance). All the insurance companies have only a non-life insurance license.
There is no life insurance in Armenia and there are no projects yet, as we don’t have a compulsory health insurance. Insurance companies are not involved in the management of mid-term funds, as well. This system is not implemented, as there is a fear that insurance companies, as such, will not have demands. The insurance of life in developed countries is quite common. In addition to compulsory health insurance, wedding, funeral and other types of insurance are also available, which are related to a particular event in life. In this case the insurance risk is the change, that “takes place” in the life of the insurant.
In Armenia insurance companies mostly compete with the compulsory type of insurance called CTP, which was imported into market in 2011. Before that, the framework of insurance companies operating in Armenia was extremely narrow. Generally, Armenian representations of foreign organizations and banks took advantage of the insurance services. CTP is the transfer of the responsibility for the damage caused by the person signing the insurance contract (insurant) to the insurance company. After investing the system of CTP in Armenia conflict situations encountered down the road were reduced, when two or more drivers could not come to an agreement about who is guilty and who is innocent. Even the obviously guilty driver did not want to accept his guilt because he realized that besides repairing his car, he must repair the vehicles of aggrieved part or parts, and if someone was injured during the crash, one should also pay for medical expenses. The situation in the market sharply changed after the introduction of the APPA system: the majority of the population began to use insurance services. In a short period of time, however, the number of operating insurance companies was reduced, which was primarily due to the restrictions on the capitalization of the Central Bank for a minimum of 1 billion drams for insurance activity.
Currently in the market there are 6 insurance companies operating in Armenia:
- Rosgosstrakh – Armenia ICJSC
- Ingo Armenia ICJSC
- Nairi Insurance ILTD
- RESO Insurance ICJSC
- Sil Insurance ICJSC
- Armenian Insurance ICJSC.
The activity of these 6 companies is regulated by the Motor Insurers Bureau (only on the part of CTP product). The Bureau defines CTP tariffs, compensation of contract signing, termination and order. Apparently, there should have only been non-price competition among the companies. However, the companies, besides the discount provided by the CB Bonus – Mallus system, also provide other discounts, which is illegal. The companies providing discounts aim to do everything possible to attract new customers and they resort to such steps. In order to correct the situation, penalties have been applied in February 2017 for any additional discounts up to 2 million in drams.
Since April, a direct compensation system has been invested. That is, each insurance company itself compensates its customer.
For comparison, if we observe the indicators of companies’ compensation for June of 2016-2017, we will have the following picture:
Obviously, the company’s indicators have changed dramatically in a year, but the positions of compensation have not changed. As the customer chooses which company will pay for him or her, and the statistics on compensation are available to everyone, customers began to “flow” to Rosgosstrakh Armenia and Ingo Armenia insurance companies. We believe that the embedded direct payment system will bring a new quality of competition to the insurance market.
One of the main reasons for unhealthy competition is the low awareness of the services provided by the insurance companies and their value among the population / customers. The overwhelming majority of the population is unaware that they can benefit from voluntary insurance at affordable prices, and in case of an accident, they can avoid excessive financial responsibility. It is extremely important to increase the role of marketing. The population needs to be provided with as much as possible information about insurance. Companies should emphasize the quality of their services, as price competition is forbidden by law.
If we imagine the opposite case for a moment when the prices are liberalized in the market, we will soon have a monopoly market.
If prices are liberalized, customers will naturally choose a service providing at affordable prices. When a flow to the company starts, after some time the given company is likely to have a repayment issue because collected insurance premiums will not be sufficient to pay compensation. The company will be declared bankrupt and its liabilities will be changed to another company that is able to provide compensation. However, customers from this company will refuse and will benefit from a third party, which at the moment offers the most affordable product in the market. As a result, with the latter will be the same as with the first insurance company. Companies will be quitting out of the market and there will remain one insurance company, which will set the price for its services for the insurance company. Or, in the other case, a company with a compensation for one or two other companies can come to an internal agreement, which is not beneficial for the client.
Author: Lilit Ovsyan. © All rights reserved.
Translator: Anna Zakaryan.