The Road Accident Fund: going, going …?

The Road Accident Fund (RAF) could go belly up, with disastrous repercussions. There will be enormous insurance implications, for instance…

The RAF is funded by the fuel levy currently paid by every motorist in South Africa. It accounts for R2,18 (updated annually) for every litre of petrol and diesel sold. According to some estimates, this provides the RAF with an average annual income of approximately R43 billion. But, despite this, recent media reports have highlighted issues like a significant backlog in paying out claims caused in part by significant administration fees. This reached a critical point in April when the RAF disclosed its precarious financial position in the North Gauteng High Court and warned of its potential collapse if not suitably addressed.

Established in 1997, the RAF provides statutory cover to all users of South African roads against injuries sustained or deaths arising from accidents involving motor vehicles within the country. This comes in the form of indemnity insurance to those who cause the accident while providing personal injury and death cover to victims of vehicle accidents and their families.

“The RAF plays a critical role in the South African market. If it becomes defunct, for whatever reason, there will be massive insurance implications. This will cause significant repercussions for insurers and road users alike. Simply put, the threat of having Section 21 of the RAF Act being triggered can be disastrous to all stakeholders,” says Sujeeth Bishoon, executive: chief underwriting officer at insurance provider Constantia Insurance.

The Act reads:

“21. (1) No claim for compensation in respect of loss or damage resulting from bodily injury to or the death of any person caused by or arising from the driving of a motor vehicle shall lie-

                (a) against the owner or driver of a motor vehicle; or

                (b) against the employer of the driver.

(2) Subsection (1) does not apply-

                (a) if the Fund or an agent is unable to pay any compensation; or

                (b) to an action for compensation in respect of loss or damage resulting from emotional shock sustained by a person, other than a third party, when that person witnessed or observed or was informed of the bodily injury or the death of another person as a result of the driving of a motor vehicle.

[Section 21 substituted by section 9 of Act 19 of 2005 with effect from…”

This means that, if the fund cannot pay claims, victims and their families can sue the driver or owner of a vehicle. If these individuals do not have the right insurance cover in place, they will be liable to pay those claims out of their own pockets.

“Just the risk of this happening highlights the importance of passenger liability cover for those operating public transport,” says Bishoon.

Insurers are now rethinking how they structure the pricing of passenger liability cover to make it more practically implementable in a worst-case scenario. The focus is now very much on determining the amount required by law for fare-paying passenger vehicle owners to meet the minimum liability insurance requirements to obtain or renew their vehicle licence.

“Even though the RAF is still operational and paying out claims, brokers must advise their customers, both commercial and personal, about the appropriate level of insurance cover required. Any broker who does not ensure their clients have the appropriate cover may leave clients exposed should something happen to the RAF,” says Bishoon.

Planning for alternative scenarios

“Fortunately, the RAF is still intact, operational and remains supported by government. For all intents and purposes, it is business as usual. However, Covid-19 and the resultant lockdown conditions mean that the levy obtained from fuel sales has reduced from the amount collected historically. On a positive note, the RAF recently published better results, arguably due to lower commuter road usage. The reprieve granted to the RAF has had the benefit of refocusing its efforts to address backlogs and plan better for the future,” says Rajen Govender, managing director at Mobility Insurance, a Constantia Insurance partner that provides insurance solutions to operators in the commercial passenger-carrying vehicle category.

Govender believes that the combined impact of Covid-19 and the perennial concerns around the financial sustainability of the RAF mean insurers and clients need to consider exposure carefully.

“There is now a real fear that if the RAF goes belly up, insurers and their clients may not be adequately prepared. In many respects, this is not something new. Being solely reliant on the RAF has always been a big risk. The events of recent months have highlighted all the intricacies and the potential negative scenarios playing out. Insurers must use this as the platform to review levels of cover with suitable pricing and educate brokers on how best to advise their commercial and personal clients,” says Govender.

“We are all grateful that the RAF is still managing the process and paying out claims. It would be remiss of us, however, not to plan for alternative scenarios. After all, is that not what insurers are there for in the first place?”