Determinants Of Comprehensive Motor Insurance Demand: Evidence From The Recent Premium Tariff Increase In Ghana

Abstract

The purpose of this paper is in two-folds: i) to identify the factors which influence the purchasing decision of Comprehensive motor insurance policy holders in Ghana and ii) to estimate the effects of a recent upward review of third party motor insurance premiums on the demand for Comprehensive motor insurance. Although motor insurance in Ghana is characterized by high frequency and severity of claims, research on it has received relatively less attention. The study uses individual-level administrative data on annual insurance purchase and renewal from Enterprise Insurance Company, the second largest insurance company in Ghana. A probit regression model was used to identify the probability of a motor owner purchasing a Comprehensive motor policy. The regression results show that the demand for Comprehensive motor insurance is significantly influenced by the premium levels, the vehicle’s year of manufacture, the vehicle’s make and type of ownership of the vehicle, the policy status (new or existing business) and the geographical location where the vehicle is used. Generally the new policy regime has had a significant effect on the demand for Comprehensive motor insurance. Probit results on policies issued six months before and after the new tariff implementation show that vehicles insured are 9.4 percentage points less likely to be Comprehensive after the policy implementation. The results show that after the new tariff implementation, the Comprehensive- Third-party mix of motor policy accounts has changed in favour of third party policies, thus most vehicles are being insured on third party basis although the percentage increase in Third-Party policies premium far outweighs the percentage increase in Comprehensive premiums. Policy makers did not expect a fall in Comprehensive insurance demand. These findings are contrary to the expectations of the industry players (firms and regulator) that the changes will make Comprehensive Policies more attractive. Hence, policy-makers in the industry must should consider the potential unexpected consequences of future policy changes.