Act on the Insurance Against Civil Liability in Respect of the Use of Motor Vehicles is amended in the loyal clients’ interest

The long-standing anomaly on the market of the compulsory third-party motor liability insurance is going to be changed by the legislator with the amendment of Act LXII of 2009 on Insurance Against Civil Liability in Respect of the Use of Motor Vehicles (Hungarian abbreviation: Gfbt.) which enters into force as of 11 March 2016.

One of the specificities of compulsory third-party liability insurance is that the insurance premium must be determined in accordance with the published premium rates (tariffs) of the insurers prevailing on the first day of the duration of the policy, and as a general rule it must not be changed by the insurer for one year that is till the next policy anniversary.

As a general rule, insurers are allowed to freely determine the premium rates according to their own business aspects. In establishing their premium tariffs, the insurers take into consideration fundamental risk factors such as policyholder’s age, damage frequency at the particular residence, the type and performance of the motor vehicle. Premium rates also provide an opportunity for the insurers to target a particular target group with the pricing of the product, e.g. a supposedly safer driver older countryman policyholder might expect much lower premiums than younger city people.

The accepted amendment is the first provision to interfere with the liberalized premium tariff system and raise barriers in connection with the free determination of the premium rates applied in the compulsory third party motor liability insurance. The reason behind this intervention is that insurers’ premium rates generally prefer new contracts in order to attract potential clients. The consequence of this situation was that a policyholder already having a third-party liability insurance could achieve lower premium by terminating his old policy and concluding a new one. As a result of this, the loyal clients – or from another aspect, those clients who do not monitor actively the changes of the insurance market – have gotten in a more unfavourable position than clients concluding a new contract.

The Act CCV of 2015 passed by the Parliament enters into force on 11 March 2016, and shall amend the provisions of Gfbt. According to the amendment, premium rates of an insurer may differentiate between contracts on the basis whether the contract is considered as a new contract or an existing contract only in favour of clients already having an existing contract. In other words, in the future insurers will not be allowed to attract potential clients with particular premium discounts given on new contracts; instead, insurers should encourage their policyholders with premium discounts to keep their policies.

Furthermore, in accordance with the new rules, the insurer is obliged to inform the policyholders of the existing contracts in the notification letter to be sent about the insurance premium applicable in the next year, that premium tariff may apply a differentiation only in favour of the policyholder on the basis that he is having an existing contract. . In addition, the insurer is obliged to inform the clients, how his or her premium is amended by the discounts concerning existing clients. Considering that it is not compulsory to provide discount for the policyholders of the existing contracts, this information may be limited to a notice that the premium rates do not include any discount. Having regard to the intense competition in the insurance market, it seems that, by way of the regulation of the mentioned disclosure obligation the legislator wants to encourage insurers to reward their faithful clients.

However, currently this provision does not mean definitely that the insurers cannot establish a premium rate system which continues to prefer new policyholders. The insurer has an opportunity to modify premium rates during the year, thus, if in a certain period of a year there is a significant number of policy anniversaries (e.g. on 1st of January), the insurer can apply “special” premium rates for this period which then will be succeeded by more favourable premium rates for the rest of the year. This loophole will be closed in the course of time by the system of the policy anniversary attached to the date of the purchase of the vehicle, thus the unfavourable discrimination of loyal clients may indeed disappear as a result of the accepted amendment.

Finally, it is important to note that the new provisions affect only the individual insurance contracts and they do not affect the premium rates of fleet contracts.

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