Sunday, December 18, 2011

Was it a bird?

As Russians gathered in Moscow recently to protest parliamentary elections, something strange was seen hovering above the crowd. Was it a bird? Was it a plane? No, it was a UFO. While at first "European and American media jumped on the story", a Russian journalist recognized the mysterious as being a camera-drone used by a Russian news agency. Of course, one has to wonder why extraterrestrials would take such an interest in Russian politics, but the recent story demonstrates the worldwide interest in extraterrestrials.

Where the idea of aliens arriving or revealing themselves was once thought as pure fantasy, recent news reports highlight the continuing fascination with finding intelligent life in the universe. Astronomers recently announced that they had found the existence of an Earth-like planet, Kepler 22-b, located 600 light-years away from our planet in the habitable zone in its solar system. According to the BBC, Kepler 22-b "is the closest confirmed planet yet to one like ours.

As mankind is currently a bit limited in its space-travel capabilities, some scientists hope that the discovery of intelligent extraterrestrials will come about via radio signals. Seth Shostak, senior astronomer at the SETI (Search for Extraterrestrial Intelligence) Institute, has said that "we are going to find alien life within the next 20 years".

In light of the hope of discovering extraterrestrials in our lifetime, I thought it would be interesting to consider what effects the arrival or discovery of extraterrestrials would have on the financial markets and the economy. While Nobel Prize-winning economist Paul Krugman recently commented that a fake alien invasion would boost the economy, one has to wonder how the public would realistically respond to the prospect of an imminent extraterrestrial arrival and/or invasion. Would an alien invasion bring about economic recovery or mass panic with a breakdown of law & order?

Whereas the discovery of radio signals from another planet might more or less be met with skepticism or apathy, an apparent arrival of extraterrestrials would be difficult to ignore. There are as many possible market outcomes to an extraterrestrial arrival as there are possible scenarios. For the sake of this article, I would like to discuss three alien arrival scenarios: (1) where intelligent extraterrestrials invade the planet in a hostile manner seeking to wipe out humanity, the "War of the Worlds/Independence Day option", (2) where a higher intelligence arrives to quell human conflicts and makes their presence known without directly interfering with humanity, but for the most part simply remains in the sky (the "Childhood's End option"), and (3) where a semi-benevolent, conversational, and highly developed humanoid race of beings arrives to quell current global conflicts and works to impose their ways, beliefs, & customs upon humanity, (the "Apocalypto/Lord of the Flies option").

There is a good chance that if extraterrestrials developed the ability to travel through space across the galaxy, they would hopefully be more enlightened than to be using violent means to achieve their ends. Far from coming down in futuristic tanks and robots, there would be much more cost-efficient ways of wiping out humanity without destroying all life and all structures on the planet, i.e. by way of a virus or by terraforming the planet. Nevertheless, given the fears of science fiction fans and even Stephen Hawking, perhaps extraterrestrials would arrive as violent invaders.

Imagine that you woke up one morning and after you turned on your computer, you went to the Drudge Report where the main headline was all in red: "ALIEN INVASION!" You would see in the top left corner of the page minor headlines in red that say things like, "We're not alone" or "Paris destroyed in or "'They look like 10' tall lizards'" or "Nukes dropped in Europe, Asia, Africa". Most likely, in such a situation the markets would drop significantly were they to even have the ability to open.

Were aliens to arrive with guns blazing, most likely the markets would simply collapse or cease to function. Were the extraterrestrials wise, they would first find some way of shutting down all electronic and telecommunication systems across the globe prior to their invasion. One looking to trade on the stock market would want to short everything in sight, but at that point it would be too late. Computers wouldn't work, telephones wouldn't work, the markets wouldn't work. Game over.

Of course, maybe all those gold and silver coins you kept would pay off in the meantime as society collapsed. The day a hostile race of extraterrestrials arrives to conquer planet Earth and wipe out humanity would most likely be a very bad day for the markets. Were that day to occur, the Dow Jones Industrial Average might not even get a chance to drop to zero. Far from bringing about an economic recovery in the spirit of Paul Krugman's suggestion, there is a good chance that actual news of a hostile, violent alien invasion would cause mass panic & a breakdown of law & order throughout society -- thereby effectively shutting down commerce and the markets.

In the novel "Childhood's End" by Arthur C. Clarke, an advanced race of peaceful extraterrestrials known as the Overlords arrived on planet Earth seeking to lead humanity into a golden age of peace, prosperity, and growth. Even so, upon arrival the Overlords never appeared before humans, but remained in their space ships hovering in the sky.

Whereas the plot of "Childhood's End" is a bit one-of-a-kind, the novel itself is our best reference of how the markets would respond. To say the least, I think an extraterrestrial arrival in the form of the Childhood's End option would be a great time to buy. In the story, after the Overlords arrived, humanity entered an age of peace & prosperity in terms of spiritual growth, but innovation and creativity waned.

That being the case, where at first the markets would be spooked as individuals looked outside to see massive extraterrestrial ships hovering in the sky, uncertainty would decline as humanity came to terms with the peaceful and apparently benevolent nature of the alien visitors. The markets (were they to remain open in such a scenario) would most likely drop at first out of fear as the extraterrestrials first arrived, but with the prospects of peace and prosperity for humanity, there would be a strong and substantial rebound.

Even so, the rebound would not last forever. As boredom and a lack of innovation & creativity set in, the market would probably become stagnant or may even decline. The market would then probably rebound significantly for some time as the future looked bright, and as boredom & a lack of creativity began to set in, that would be the time to sell and take profits. Of course, in the case of "Childhood's End", monetary rewards from prudent trading would be short-lived. Why? You'll have to read the novel to find out.

While humanity can get so bogged down in its own conflicts, the arrival of extraterrestrials would seemingly put those temporal conflicts into a cosmic perspective, i.e. human conflicts & problems are quite miniscule from a cosmic perspective of the universe. Many humans would welcome this benevolent extraterrestrial imperialism in light of the human-dominated alternative. Entrepreneurs may see the alien visitors as being a possible source of revenue and/or resources. Perhaps technology would increase; perhaps optimism would consume the markets providing fertile ground for business leaders. Humanity may even experience a shift in consciousness thereby restoring a sense of balance to the markets.

While the establishment of law & order helps to make an economy function properly, the arrival of a higher intelligence may cause individuals to behave more ethically and efficiently. On the other hand, a collapse of organized religion could give way to a decline in common morality. That sense of guidance, security, and certainty could work to significantly boost the markets. Nevertheless, the specter of cosmic panic could set in as mankind becomes wary of the alien visitors. Panic could then turn to desperation and/or mass hysteria as humanity suffers a sort of trauma in coming to terms with its lack of intelligent uniqueness in the universe.

Either way, were extraterrestrials to arrive and impose their ways, beliefs, & customs upon humanity, there is a good chance that the stock market would cease to function as it does today. Commerce could possibly dry up owing to public trauma and mass hysteria from individuals' realizing that we are not alone in the universe. Some people might even stop going to work out of a sense of temporal earthly meaninglessness. Various sectors of the economy would fail while others would soar; a new perspective on the universe might change the way humans buy and sell products and services.

In this light, whether or not the market would boom or bust in the event of the Apocalypto/Lord of the Flies option is probably a flip of the coin. Even so, one cannot help but be optimistic in that if benevolent extraterrestrials arrived, then maybe everything will work out after all. People might think to themselves, "Extraterrestrials are here...we are not alone...this is a new beginning...everything's going to work out now.Given the current state of the planet and cynical hopelessness regarding the course of humanity, at least in this time period, hope can be a valuable commodity.

Sunday, December 11, 2011

Effective Deposit Insurance Systems

In July 2008, the Basel Committee on Banking Supervision (BCBS) and the International Association of Deposit Insurers (IADI) decided to collaborate to develop an internationally agreed set of core principles for deposit insurance using the IADI Core Principles for Effective Deposit Insurance Systems (February 2008) as a basis.1 A joint working group comprised of representatives from the BCBS’s Cross-Border Bank Resolution Group (CBRG) and IADI’s Guidance Group was formed to develop a set of core principles to be submitted to the BCBS and IADI for their respective review and approval. The Consultative Document, entitled Core Principles for Effective Deposit Insurance Systems, was completed in March 2009 and endorsed by the international community in June 2009. The document presents 18 Core Principles, each of which is augmented by supporting explanations and guidance. An accompanying set of Preconditions addresses mainly external elements necessary to support effective deposit insurance systems.
The Core Principles are reflective of, and designed to be adaptable to, a broad range of country circumstances, settings and structures. The Core Principles are intended as a voluntary framework for effective deposit insurance practices. National authorities are free to put in place supplementary measures that they deem necessary to achieve effective deposit insurance in their jurisdictions. The Core Principles are not designed to cover all the needs and circumstances of every deposit insurance system or prescribe a single specific form of deposit insurance. Instead, specific country circumstances should be considered in the context of existing laws and powers to fulfil the public policy objectives and mandate of the deposit insurance system.
An assessment of a country’s compliance with the Core Principles can be a useful tool for countries that are implementing, reviewing or actively reforming a deposit insurance system. A comprehensive, credible and action-oriented assessment should focus on the deposit insurance system and its relationship to the safety-net functions which support it. The assessment of the broader safety-net functions (ie preconditions) is mostly outside the jurisdiction of the deposit insurer. But, can have a direct effect on the deposit insurer’s ability to fulfil its mandate. The assessment of a deposit insurance system should identify strengths and weaknesses in the existing deposit insurance system and form a basis for remedial measures by deposit insurers and policymakers (eg government authorities or if it is primarily a private system, its member banks) after taking into account the structural, institutional and legal features of each national deposit insurance system. The review of the broader safety net will need to rely on external reports – including, for example, those resulting from recent Financial Sector Assessment Program (FSAP) efforts – or include assessment teams members with the necessary experience and skills. If no such reports are available then the assessment should indicate that there is insufficient information available for a complete review of preconditions.
1 IADI was established in 2002 with a mission to contribute to the enhancement of deposit insurance effectiveness by promoting guidance and international cooperation. The IADI Core Principles were developed for the benefit of countries considering the adoption or the reform of a deposit insurance system.
Core Principles for Effective Deposit Insurance Systems - Assessment methodology 1
The following Methodology was developed collaboratively by representatives of the BCBS, IADI, the European Forum of Deposit Insurers (EFDI), the European Commission (EC), the International Monetary Fund (IMF) and the World Bank (WB). The remainder of this introductory section addresses the Methodology use, compliance assessment, and practical considerations in conducting an assessment. The next section focuses on evaluating a country’s preconditions. The last section lists in detail the criteria for assessing compliance with the Core Principles.
Use of methodology
The methodology can be used in multiple contexts: (i) self-assessment performed by the deposit insurer; (ii) IMF and World Bank assessments of the quality of deposit insurance systems, for example, in the context of the FSAP; (iii) reviews conducted by private third parties such as consulting firms; and (iv) peer reviews conducted, for example, within IADI regional committees. IADI, in cooperation with the BCBS, will be active in interpreting the Core Principles and providing training with disseminating norms and good practices during the assessment process.
Whether conducted by a deposit insurer (self-assessment) or an outside party, a fully objective assessment of compliance with the Core Principles should be performed by suitably qualified parties who bring varied perspectives to the process. It is crucial that the parties be made up of suitably qualified persons including individuals with experience working in a deposit insurance system. A fair assessment of the deposit insurance system also requires the genuine cooperation of all relevant authorities. The process of assessing each of the 18 Core Principles requires a judgmental weighting of numerous elements that only qualified assessors with practical, relevant experience can provide. To the extent that the assessment requires legal and accounting expertise in the interpretation of compliance with the Core Principles, these legal and accounting interpretations must be in relation to the legislative and accounting structure of the relevant country. The assessment must be comprehensive and in sufficient depth to allow a judgment on whether criteria are fulfilled in practice, not just in theory. Similarly, laws and regulations need to be sufficient in scope and depth. There also must be effective enforcement of and compliance with those laws and regulations on the part of regulators and supervisors and the deposit insurer. Finally, the assessment of compliance with the core principles will build upon any recent work in similar areas such as the FSAPs.
Definitions of key terms used in methodology
The term “deposit Insurer” is used in this methodology to refer to the specific legal entity responsible for providing deposit insurance, deposit guarantees or similar deposit protection arrangements. In some jurisdictions this function may be assigned to another participant in the financial safety net. The term “deposit insurance system” refers to the deposit insurer and its relationships with the financial system safety-net participants that support deposit insurance functions and resolution processes. The “financial system safety net" is defined to include the functions of prudential regulation and supervision, resolution authority, a lender of last resort and deposit insurance. In many countries, a department of government (generally a Ministry of Finance or Treasury) is responsible for financial sector policy and is included in the financial system safety net.
2 Core Principles for Effective Deposit Insurance Systems - Assessment methodology
The public policy objectives of the deposit insurance system refer to the objectives or goals the system is expected to achieve. The mandate of the deposit insurer refers to the set of official instructions describing its roles and responsibilities. There is no single mandate or set of mandates suitable for all deposit insurers. Assigning a mandate to a deposit insurer must take country specific circumstances into account. Existing deposit insurers have mandates ranging from narrow, so-called “paybox” systems to those with broader responsibilities, such as preventive action and loss or risk-minimisation/management, with a variety of combinations in between.
Compliance assessment
The primary objective of an assessment should be to evaluate compliance with the Core Principles for Effective Deposit Insurance Systems after taking into account the structural, legal and institutional features of each national deposit insurance system. The assessment should review the functions inherent in providing effective deposit insurance systems as opposed to an assessment of just the deposit insurer. In so doing the assessment will identify the strength(s) of the deposit insurance system, and the nature and extent of any weaknesses. Importantly, the assessment is a means to an end, not an objective in itself. The assessment process should help the deposit insurer and policymakers benchmark their deposit insurance system against the Core Principles to judge how well the system is meeting its public policy objectives. The assessment, in turn, can also aid the deposit insurer and policymakers in making improvements to the deposit insurance system and financial safety net, as necessary.
The Methodology proposes a set of essential and additional criteria for each Core Principle. The essential criteria are the only elements on which to gauge full compliance with a Core Principle. The additional criteria are aspirational in nature and comprise suggested good practices. The essential criteria and to a significant degree the additional criteria, are drawn from the Core Principles document and related background papers prepared by IADI and BCBS. Although the additional criteria will not be used for assessing compliance with a Core Principle, a country, or deposit insurer in the case of a self-assessment, could choose to be assessed against the additional criteria in order to identify areas in which improvements to the deposit insurance system could be made.
Assessments by external parties follow a five-grade scale as follows:2

Compliant: When the essential criteria are met without any significant deficiencies.3

Largely compliant: When only minor shortcomings are observed and the authorities are able to achieve full compliance within a prescribed time frame.

Materially non-compliant: Severe shortcomings which cannot be rectified easily.

Non-compliant: No substantive implementation of the Core Principle.
2 This scale is used for external assessments in the Basel Committee’s Core Principles Methodology (Banking Supervision), available at www.bis.org/publ/bcbs130.htm.
3 In order to achieve a “Compliant” grade it is not always necessary to achieve compliance on all essential criteria for each Core Principle. For example, if a deposit insurance system is compliant with eight out of nine essential criteria for a specific Core Principle but is not compliant in a relatively minor area, then the overall compliance rating could be designated “Compliant”. Assessors must exercise judgment in these situations.
Core Principles for Effective Deposit Insurance Systems - Assessment methodology 3

Not applicable: Not considered given the structural, legal and institutional features of the deposit insurance system.
Grading is not an exact science and the Core Principles can be met in different ways. The assessment criteria should not be seen as a checklist approach to compliance but as a qualitative exercise. The number of criteria receiving a compliance grade and the commentary that should accompany each grade will be weighed in the scoring process for each Core Principle, however, not all criteria will carry equal weight.It is critical for the assessors to receive training on consistent application of the methodology. The Core Principles are benchmarks for effective deposit insurance practice. In implementing them, deposit insurers and policymakers will need to take into account country specific factors.
Assessors should pay close attention to the adequacy of preconditions and include their opinion on gaps and weaknesses in the preconditions and actions that policymakers could take to mitigate those weaknesses. The assessment of compliance with individual Core Principles could flag the Core Principles which are likely to be primarily affected by preconditions considered to be weak, after factoring in specific country circumstances, mandate and structures of the deposit insurance system (see Annex 3 for further details). However, assessors should not undertake to assess compliance with preconditions themselves. Instead, assessors should rely on the results of recent IMF/WB FSAP reports wherever possible. If a report has not been conducted recently, assessors should request from the authorities that they be provided with updates on any changes since the previous FSAP report. If no such reports on preconditions are available assessors should assign an “Insufficient Information” to the precondition review. Recommendations with regard to the preconditions should not be part of the action plan associated with the Core Principles assessment, but should be included in other general recommendations for strengthening the deposit insurance system.
In order to assist assessors in interpreting the methodology and identifying Core Principles that may or may not be applicable in all types of arrangements of deposit insurance systems, a “Guide for Assessors” document will be developed. This document will include supporting guidance to assist assessors in applying the criteria to specific country settings and structures. It is intended that the Guide be developed and updated over time to take into account the experiences and lessons learned in conducting compliance assessments.
Practical considerations in conducting an assessment
Annex I to this document presents a format for conducting an assessment and preparing a report. It is based on the format developed by the IMF and the World Bank for conducting assessments of compliance with the Basel Committee’s Core Principles for Effective Banking Supervision (BCP).
Certain practical considerations should be made when conducting an assessment.
1. The assessor must have access to a range of information and interested parties. This may include, but not be limited to published information (such as relevant laws, regulations and policies) and more sensitive information (such as previously completed self-assessments, information on the health of insured institutions such as supervisory examination results, and operational guidelines for the deposit 4 Core Principles for Effective Deposit Insurance Systems - Assessment methodology
insurer). This information should be provided as long as it does not violate legal requirements for the deposit insurer to hold such information confidential.4 The assessor will also need to meet with a range of individuals and organisations, including other financial system safety-net participants and relevant government ministries, commercial bankers and auditors. Special note should be made of instances when any required information is not provided, as well as of what effect this might have on the accuracy of the assessment.
Assessors should set out the range of information required from the authorities involved and explain in the opening meeting to the individuals involved how the assessment will proceed. This should include the process to be followed in the assessment for the review of preconditions.
2. The assessment of compliance with each Core Principle requires the evaluation of a chain of related requirements, such as law, prudential regulation and supervisory guidelines, among other things. The assessment must ensure that the requirements are or can be put into practice. For example, policymakers must ensure that the deposit insurer has the necessary operational autonomy, skills and resources.
3. In addition to identifying deficiencies, the assessment should also highlight positive features and specific achievements.
4. Cooperation and information sharing among safety-net participants is necessary for the effectiveness of the deposit insurance system. The assessor should be able to judge whether such information sharing occurs to the extent needed. Depending on the extent of cross-border banking, it is also important that the assessor is able to judge whether information sharing between and among deposit insurers and other safety-net participants in different countries occurs to the extent needed.
Preconditions
A deposit insurance system will be most effective if a number of external elements or preconditions are in place. Although these elements are mostly outside the jurisdiction of the deposit insurance system, they can have a direct effect on the deposit insurer’s ability to fulfil its mandate. In choosing to implement a deposit insurance system, a number of interrelated components of the national financial system should be considered: the condition of the economy and banking system; the sound governance of agencies comprising the safety net; whether there is strong prudential regulation and supervision; and whether there is a well-developed legal framework and accounting and disclosure regime. Any assessment of the effectiveness of a deposit insurance system should begin with an assessment of these preconditions. The views of the public and their expectations regarding deposit protection are also important factors to be considered.
It is important to identify where existing preconditions are not ideal. If actions are necessary to address any deficiencies, they can be taken with the adoption or reform of a deposit insurance system.
4 Assessments of Core Principles of Banking Supervision have shown that secrecy issues can often be solved through ad hoc arrangements between the assessor and the assessed institution. See Core Principles Methodology (Banking Supervision), p. 4.
Core Principles for Effective Deposit Insurance Systems - Assessment methodology 5
Assessment of the economy and banking system
To be effective, policymakers should seek to ensure that the deposit insurance system is instituted, consistent with both the country’s economic and institutional settings and aligned with the public-policy objectives they are attempting to achieve. The establishment or reform of a deposit insurance system is more difficult if underlying issues relating to the health and stability of the economy and the banking system have not been addressed. Although conditions are unlikely to be perfect, it is important to determine how the economic and institutional structure of the country may impact on the deposit insurance system.
Policymakers should therefore undertake a situational analysis of the economic environment in order to identify conditions that could adversely affect the economy of the banking system and evaluate whether a deposit insurance system can be effective operating in such an environment. Key elements for review are:
1. Conditions that could adversely affect the economy or the banking system are to be identified and an evaluation is made whether a deposit insurance system can be effective operating in such an environment.
2. If actions are necessary, they are taken before or in concert with the adoption or reform of a deposit insurance system.
Macroeconomic stability
Macroeconomic instability hampers the functioning of markets and can distort financial intermediation. It is more difficult for banks and their clients to judge different types of risks in times of deteriorating economic growth, high inflation, and extreme exchange rate volatility.
The introduction or reform of a deposit insurance system will not on its own be sufficient to restore macroeconomic stability. As an element of the financial safety net, the deposit insurance system complements the prudential regulation and the lender of last resort functions. When macroeconomic conditions are unstable the introduction or reform of a deposit insurance system will be less effective. Key element for review is:
Conditions and factors affecting the banking system and influencing the effectiveness of a deposit insurance system should be analyzed before the introduction or reform of the system. These may include: an assessment of the level of economic activity; current monetary and fiscal policies; consumer price and asset inflation as well as the condition of financial markets.
Sound banking system
In looking at the financial system, the issue is not just whether there are unsound institutions in the system but whether the banking system in its entirety is sound. The assessment should look at both the financial health and structure of the banking sector. Key elements for review are:
1. An assessment of the health of the banking system and other deposit taking institutions which includes a detailed evaluation of capital adequacy, liquidity, credit quality, risk-management policies and practices, and the extent of any problems. When problems exist, an assessment is made as to whether they are confined to individual deposit taking institutions or are systemic in nature. 6 Core Principles for Effective Deposit Insurance Systems - Assessment methodology
2. The structure of the banking system in terms of the number, type and characteristics of deposit taking institutions as these will have design implications for a deposit insurance system. Policymakers also may need to examine the extent of interconnectedness, competition, concentration, and the ownership of institutions.5
3. Any pre-existing depositor protection arrangements (eg depositor preference) and how these arrangements would interact with the introduction or reform of a deposit insurance system.
Sound governance of agencies comprising the financial safety-net
The sound governance of agencies comprising the safety-net strengthens the financial system’s architecture and contributes directly to financial system stability. Governance generally refers to the processes, structures and information used for directing and overseeing the management of an organisation. Importantly, governance also pertains to the relationship between the organisation and the authority from which it receives its mandate or other authority to which it is ultimately held accountable. Sound governance is comprised of independence, accountability, transparency and disclosure, and integrity. Key elements for review are:
1. Each safety-net participant is operationally independent. The organisation(s) have the ability to use the powers and means assigned to them without undue influence from external parties. The deposit insurer and other safety-net participants should be aligned in their objectives in the financial safety net in order to achieve them without compromise.
2. In support of the deposit insurance system, the other safety-net participants should be provided with all powers necessary to fulfil their mandates.
Strong prudential regulation and supervision
The strength of prudential regulation and supervision will have direct implications for the effectiveness of a deposit insurance system. Strong prudential regulation and supervision should allow only viable banks to operate and be members of the deposit insurance system. Banks should be well-capitalised and follow sound-and-prudent risk management, governance and other business practices. The supervisory authority should have an effective licensing or chartering regime for new banks, conduct regular and thorough examinations of individual banks and have a troubled bank resolution framework that includes early detection and timely intervention. Key element for review is:
The system of prudential regulation and supervision is in compliance with the Basel Core Principles for Effective Banking Supervision.
5 In situations where resource distribution and credit decisions are directed mainly by the state, the state is viewed as being responsible for the results of such operations. Deposits in such systems generally are perceived as having a full government guarantee.
Core Principles for Effective Deposit Insurance Systems - Assessment methodology 7
Well-developed legal framework
Deposit insurance systems cannot be effective if relevant laws do not exist or if the legal regime is characterised by inconsistencies. A well-developed legal framework should include a system of business laws, including: corporate, insolvency processes, contract, consumer protection, anti-corruption/fraud and private property laws. Furthermore, the legal framework must enable the deposit insurance system to compel member banks to comply with their obligations to the deposit insurer.6 Key elements for review are:
1. The legal system is well-developed with clear property rights.
2. Laws are in place under which the banking system and the deposit insurer can operate.
3. A legal framework exists for handling a bank failure that includes a method for effective failure resolution in a timely manner. Policymakers have determined whether the failure resolution framework should be governed by bankruptcy/insolvency laws or by a special resolution regime.
4. Banking laws and regulations are updated as necessary to ensure that they remain effective and relevant to a changing industry.
5. Information exchange between the deposit insurance system participants and the supervisor is legally protected for all measures necessary in order to protect the deposits and to enable safety-net participants to intervene in case a bank is at risk.
6. Appropriate participants in the financial safety net are entitled to protect depositors through a number of options including transferring deposits from the troubled bank to a healthy bank.
7. The deposit insurance system participants, or other relevant authority, can take legal action against the management of a failing bank.
Sound accounting and disclosure regime
Sound accounting and disclosure regimes are necessary for an effective deposit insurance system. Accurate, reliable and timely information provided by these regimes can be used by management, depositors, the marketplace, and authorities to make decisions regarding the risk profile of a bank, and thereby increase market, regulatory and supervisory discipline. A sound accounting and disclosure regime should include comprehensive and well-defined accounting principles and rules that command wide international acceptance. A system of independent audits is needed for companies of significant size, including banks, to ensure that users of financial statements have independent assurance that the accounts provide a true and fair view of the financial position of the company and are prepared according to established accounting principles, with auditors held accountable for their work. In cases where there are signs that a bank is at risk and the deposit insurer does not otherwise have access to information about that bank from another safety-net participant, the deposit insurer must be entitled to obtain/receive the necessary information in a timely manner. Key elements that assessors need to focus their review on are:
6 The term “bank” is used to denote financial institutions which accept insured deposits. 8 Core Principles for Effective Deposit Insurance Systems - Assessment methodology
1. Accounting and disclosure regimes support the ability of the supervisor and deposit insurer to adequately evaluate the health of individual banks and the banking system as a whole.
2. Accounting and disclosure regimes support the accurate and timely identification of information on depositor accounts for the purposes of prompt reimbursements.
3. Accounting and disclosure regimes support the use of risk-adjusted differential premium systems if adopted by the deposit insurer.
4. The deposit insurer has the right to seek, or request the supervisor or other safety-net participant, to carry out or provide for an audit or inspection of a member bank in a timely manner if evidence shows that deposits may be at risk.
Core Principles for Effective Deposit Insurance Systems - Assessment methodology 9
Core Principles Methodology Assessment Criteria
Setting objectives
Principle 1 – Public policy objectives
The first step in adopting a deposit insurance system or reforming an existing system is to specify appropriate public policy objectives that it is expected to achieve. These objectives should be formally specified and well integrated into the design of the deposit insurance system. The principal objectives for deposit insurance systems are to contribute to the stability of the financial system and protect depositors.
Essential criteria
1. The public policy objectives of the deposit insurance system are clearly defined and formally specified, for example, through legislation or documents accompanying legislation.7
2. The public policy objectives of the deposit insurance system are publically disclosed.
3. There is a review of the extent to which a deposit insurance system is meeting its public policy objectives on a regular basis (eg between two to five years or on a more frequent basis as deemed necessary). This review takes into consideration the views of stakeholders.
Principle 2 – Mitigating moral hazard
Moral hazard should be mitigated by ensuring that the deposit insurance system contains appropriate design features and through other elements of the financial system safety net (see Core Principles for Effective Deposit Insurance Systems “Preconditions” paragraph 16).
Essential criteria
1. The design of the deposit insurance system recognises the existence of moral hazard and mitigates it as much as possible in-line with public policy objectives. Specific design features that mitigate the risk of moral hazard may include: limited deposit insurance coverage and scope; where appropriate, deposit insurance premiums that are assessed on a differential or risk-adjusted basis; and, minimising the risk of loss through timely intervention and resolution by the deposit insurer or other participants in the safety net with such powers.
2. The financial safety net creates and supports appropriate incentives to mitigate moral hazard. These may include: the promotion of good corporate governance and
7 The public policy objectives of the deposit insurance system refer to the objectives or goals the system is expected to achieve. The mandate of the deposit insurer refers to the set of official instructions or statement of purpose describing its roles and responsibilities. There is no single mandate or set of mandates suitable for all deposit insurers. Existing deposit insurers have mandates ranging from narrow, so-called “paybox” systems to those with broader powers or responsibilities, such as preventive action and loss or risk-minimisation/management, with a variety of combinations in between.
10 Core Principles for Effective Deposit Insurance Systems - Assessment methodology
sound risk management of individual banks, effective market discipline and frameworks for, and enforcement of, strong prudential regulation, supervision and laws and regulations (to be assessed through a review of “Preconditions”, see pages 8-9.).
Mandates and powers
Principle 3 – Mandate
It is critical that the mandate selected for a deposit insurer is clearly and formally specified and that there is consistency between the stated public policy objectives and the powers and responsibilities given to the deposit insurer.
Essential criteria
1. The deposit insurer has a mandate that is clearly defined and formally specified, for example, through legislation or documents accompanying legislation. The mandate clarifies the role and responsibilities of the deposit insurer within the financial safety net.
2. The mandate is consistent with the stated public policy objectives and the powers, roles and responsibilities given to the deposit insurer.
Principle 4 – Powers
A deposit insurer should have all powers necessary to fulfil its mandate and these should be formally specified. All deposit insurers require the power to finance reimbursements, enter into contracts, set internal operating budgets and procedures, and access timely and accurate information to ensure that they can meet their obligations to depositors promptly.
Essential criteria
1. The powers (legal authority) of the deposit insurance system are clearly defined and formally specified in law or regulation (including approved self-regulation in the context of private or public deposit insurance systems).
2. The powers of the deposit insurer are aligned to its mandate and public policy objectives.
3. The deposit insurer has the following minimum powers:
(a) compel member banks to comply with their obligations to the deposit insurer, or request that the supervisor or another safety-net participant do so on behalf of the deposit insurer;
(b) have the legal authority and capability to reimburse depositors;
(c) enter into contracts (eg agreements/transactions to obtain goods and services/insurance);
(d) set internal operating budgets and internal policies and procedures (eg in areas such as human resources and information technology);
Core Principles for Effective Deposit Insurance Systems - Assessment methodology 11
(e) access timely and accurate information to promptly meet their obligations to depositors;
(f) share information with other safety-net participants;
(g) engage in information sharing and coordination agreements with deposit insurers in other jurisdictions (subject to confidentiality when required); and
(h) engage in contingency planning.
4. In support of the deposit insurance system, the other participants in the financial safety net are provided with all powers necessary to fullfil their mandates (see Preconditions).
Governance
Principle 5 – Governance
The deposit insurer should be operationally independent, transparent, accountable and insulated from undue political and industry influence.
Essential criteria
1. The deposit insurer is able to use the powers and means assigned to it without undue influence from external parties. There is in practice no significant evidence of government or industry interference in the operational independence of the deposit insurer and its ability to obtain and deploy the resources needed to carry out its mandate.
2. The operational funding of the deposit insurer is provided in a manner that does not undermine its autonomy or independence and permits it to fulfill its mandate. Examples include:
(a) Salary scales that allow it to attract and retain qualified staff;
(b) The ability to hire outside experts to deal with special situations, subject to appropriate confidentiality restrictions;
(c) A training budget and programme that provides appropriate training opportunities for staff;
(d) A budget for computers and other equipment sufficient to equip its staff with tools needed to fulfil its mandate; and
(e) A travel budget that allows appropriate on-site work.
3. The governing statute, internal policies of the deposit insurer or other relevant laws or policies specify:
(a) the governing body and management are fit and proper persons and have the requisite knowledge or experience;
(b) members of the governing body (with the exception of ex-officio appointees) and the head of the deposit insurer are subject to limitations on their term of appointment; and
12 Core Principles for Effective Deposit Insurance Systems - Assessment methodology
(c) members of the governing body can be removed from office during their term only for reasons specified or defined in law or rules of professional conduct, and not without cause.
4. The members of the governing body (eg directors or officers) and management of the deposit insurer are held accountable to a higher authority, whether public or private, through a transparent framework for the discharge of the system’s duties in relation to its objectives and mandate.
5. The deposit insurer operates in a transparent and responsible manner. It discloses and publishes on a regular basis appropriate information on its activities, governance practices, structure and financial results.
6. The deposit insurer is structured such that the potential for conflicts of interest for or between members of the governing body and management is minimised and that they are subjected to appropriate codes of conduct/ethics.
7. The deposit insurer takes into consideration the views of stakeholders.
8. Where decision making is delegated by the governing body of the deposit insurer to its employees, the governing body has appropriate procedures to oversee the exercise of delegation.
9. The deposit insurer is subjected to regular external audits with reports provided to the authority to which it is accountable.
10. The deposit insurer has a governing body approved strategic plan in place.8
11. Regular board meetings are held (eg on a quarterly basis or more frequently as deemed necessary).
Additional criterion
1. The deposit insurer adheres to best practices in corporate governance, such as:
(a) Regular assessments of the extent to which the governing body is meeting its objectives are carried out. Systems and practices are in place to facilitate assessments of its effectiveness; and
(b) The governing body has a well-defined charter that outlines the specific powers reserved for the board and those delegated to management.
Relationships with other safety-net participants and cross-border issues
Principle 6 – Relationships with other safety-net participants.
A framework should be in place for the close coordination and information sharing, on a routine basis as well as in relation to particular banks, among the deposit insurer and other
8 The term “strategic plan” refers to a document which sets out an organisation’s goals and how it plans to achieve them.
Core Principles for Effective Deposit Insurance Systems - Assessment methodology 13
financial system safety-net participants. Such information should be accurate and timely (subject to confidentiality when required). Information-sharing and coordination arrangements should be formalised.
Essential criteria
1. A framework for timely information sharing and the coordination of actions among the deposit insurer and other safety-net participants, on a routine basis as well as in relation to particular banks, is explicit and formalised through legislation, regulation, memoranda of understanding, legal agreements or a combination of these instruments.
2. Planning and operations of safety-net participants, both individually and together, not only cover past and ongoing circumstances but also consider plausible future scenarios.
3. All deposit insurers are provided with information on a timely basis to be able to reimburse depositors’ claims promptly including information on the amount of insured deposits held by individual depositors.
4. Rules regarding confidentiality of information apply to all safety-net participants and the exchange of information among them.
5. The safety-net participants make information on banks that are in financial difficulty or are expected to be in financial difficulty available to the deposit insurer in advance and, where confidentiality requirements prevent this, or where the information is not available from other safety-net participants, the deposit insurer has the power to collect information directly from such banks.
Additional criterion
1. A deposit insurer with a broader mandate, such as “loss-” or “risk-minimisation”, has access to timely and accurate information so that it can assess the financial condition of individual banks, as well as the banking industry. These deposit insurers may also need access to information regarding the value of the bank’s assets and the expected time frame for the liquidation process, given that the value of a bank’s assets depends, in part, on the time necessary to liquidate them.
Principle 7 – Cross-border issues
Provided confidentiality is ensured, all relevant information should be exchanged between deposit insurers in different jurisdictions and possibly between deposit insurers and other foreign safety-net participants when appropriate. In circumstances where more than one deposit insurer will be responsible for coverage, it is important to determine which deposit insurer or insurers will be responsible for the reimbursement process. The deposit insurance already provided by the home country system should be recognised in the determination of levies and premiums.
Essential criteria
1. Appropriate cross-border bilateral/multilateral agreements are in place in circumstances where, due to the presence of cross-border banking operations, coverage for deposits in foreign branches is provided by the deposit insurer in
14 Core Principles for Effective Deposit Insurance Systems - Assessment methodology
another jurisdiction or by a combination of deposit insurers in different jurisdictions. For example, where the home country system provides coverage for the branches of its domestic bank, banks in the host countries and/or the host country system provides supplementary coverage for foreign bank branches.
(a) The agreements involve appropriate home and host deposit insurers as well as other appropriate financial safety-net participants when appropriate, including in circumstances where one deposit insurer will be solely responsible for coverage.
(b) The agreements provide for ongoing close coordination and information sharing between home/host deposit insurers and possibly other safety-net participants, as well as in relation to particular banks when necessary.
(c) The agreements specify which deposit insurer or insurers will be responsible for reimbursement as well as premium assessment, cost sharing, and the deposit insurance public awareness issues raised by cross-border banking.
2. Depositors in the jurisdictions affected by cross-border banking arrangements are provided with clear and easily understandable information on the existence and identification of the deposit insurance system legally responsible for reimbursement and the limits and scope of coverage. Information on the deposit insurance system’s source of funding and standard claims procedures and reimbursement options is also available to affected depositors (eg such as on the deposit insurer’s website, through printed materials or similar means).
Additional criterion
1.
Where a deposit insurer perceives a real risk that it may be required to protect depositors in another jurisdiction, its contingency planning allows for cross-border arrangements or agreements. For example, it has an agreement with the deposit insurer in that jurisdiction to provide for insured depositor reimbursements.
Membership and coverage
Principle 8 – Compulsory membership
Membership in the deposit insurance system should be compulsory for all financial institutions accepting deposits from those deemed most in need of protection (eg retail and small business depositors) to avoid adverse selection.
Essential criteria
1. Membership in a deposit insurance system is compulsory for all financial institutions accepting deposits from those deemed most in need of protection (eg retail or individual depositors and small business depositors).
2. Policymakers determine whether eligible banks will be given membership as a part of the licensing process or upon application to the deposit insurer.
3. Criteria for membership that detail the conditions, process and time frame for attaining membership are explicitly stated and transparent.
Core Principles for Effective Deposit Insurance Systems - Assessment methodology 15
4. If the deposit insurer does not control membership (ie cannot refuse membership), the law or administrative procedures describe a clear time frame in which the deposit insurer is consulted about or informed in advance of “newly licensed” banks.
5. When deposit insurance membership is terminated by the deposit insurer, arrangements are in place that provide for coordination in withdrawing the bank’s operating license by the relevant authority. If relevant, an appropriate general notice is given to depositors (eg on the deposit insurer’s website) to inform them that any new deposits issued will not receive deposit protection.
6. All financial institutions accepting deposits are subject to strong prudential regulation and supervision and are financially viable when they become members of a deposit insurance system.9
Principle 9 – Coverage
Policymakers should define clearly in law, prudential regulations or by-laws what is an insurable deposit. The level of coverage should be limited but credible and be capable of being quickly determined. It should cover adequately the large majority of depositors to meet the public policy objectives of the system and be internally consistent with other deposit insurance system design features.
Essential criteria
1. Insured deposits are clearly and publicly defined. This comprises the level and scope of coverage. If certain depositors are ineligible for deposit protection, the criteria are clearly defined.
2. The definition of “insured deposit” reflects the public policy objectives of protecting depositors and promoting public confidence and financial stability (eg protect small transaction accounts).
3. The level of coverage is limited but credible (eg the level of coverage is high enough to maintain confidence, but limited to maintain market discipline). The level of coverage is consistent with the deposit insurer’s public policy objectives.
4. Depositors have sufficient information readily available to determine the amount of coverage for their individual deposits.
5. The coverage limit applies equally to all banks in a deposit insurance system.
6. The deposit insurance system does not incorporate co-insurance, where depositors absorb some portion of the loss under the coverage limit in the event of bank failure.10
9 See discussion “Preconditions” pages 2, 6 and 8.
10 Although the use of co-insurance can encourage depositors to monitor bank risk taking, it presents a number of serious problems. In order to provide effective market discipline it assumes that depositors will have access to the necessary financial information and that most retail/individual depositors can accurately assess risk. And, even when depositors are in a position to make such determinations, co-insurance provides strong incentives for depositors to run on a bank to avoid even a small loss of their funds.
16 Core Principles for Effective Deposit Insurance Systems - Assessment methodology
7. Deposit insurance coverage is reviewed periodically to ensure that it can meet the public policy objectives of the deposit insurance system.
Additional criteria
1. If set-off is utilised by a deposit insurance system, it is consistent with the prevailing legal framework.
2. In the event of a merger of separate banks that are members of the deposit insurance system, depositors of the merged banks enjoy separate coverage (up to the maximum coverage limit) for each of the banks for a limited but publicly stated period in which case the merging banks must be held responsible for notification of affected depositors, including the date at which time the separate coverage will expire.
Principle 10 – Transitioning from a blanket guarantee to a limited coverage deposit insurance system
When a country decides to transition from a blanket guarantee to a limited coverage deposit insurance system, or to change a given blanket guarantee, the transition should be as rapid as a country’s circumstances permit.11 Blanket guarantees can have a number of adverse effects if retained too long, notably moral hazard. Policymakers should pay particular attention to public attitudes and expectations during the transition period.
Essential criteria
1. A situational analysis of the economic environment as it affects the banking system is conducted before a country begins a transition from a blanket guarantee to limited coverage.
2. The situational analysis assesses structure and soundness of the banking system including an evaluation of the condition of banks’ capital, liquidity, credit quality, risk management policies and practices, and the extent of any problems; and an evaluation of the number, type and characteristics of banks.
3. The situational analysis assesses the strength of prudential regulation and supervision, the effectiveness of the legal framework, and the soundness of the accounting and disclosure regimes.
4. The pace of the transition to limited coverage is consistent with the state of the banking industry, prudential regulation and supervision, legal framework and accounting and disclosure regimes.
11 A “blanket guarantee” is a declaration by authorities that in addition to the protection provided by limited coverage deposit insurance or other arrangements, certain deposits and perhaps other financial instruments will be protected. A wide range of factors need to be considered when introducing blanket guarantees, including decisions on the scope of the guarantee (eg the type of institutions, products and term maturities covered) and whether the banks utilising the guarantees will be required to contribute in some manner to the costs of providing the guarantees.
Core Principles for Effective Deposit Insurance Systems - Assessment methodology 17
5. Policymakers are aware of the tradeoff between the length of time it takes for the transition to the limited coverage system and the degree of moral hazard in the system, and have planned the transition accordingly.
6. Policymakers are aware of and anticipate the reaction of the public to a reduction in coverage levels. Policymakers develop effective communication strategies to mitigate adverse public reaction to the transition.
7. Where there is a high level of capital mobility, and/or a regional integration policy, the decision to lower coverage levels (and/or scope) considers the effects of different countries’ protection levels and related policies.
8. The new limited-coverage deposit insurance system has access to adequate funding during and after the transition. Policymakers consider the capacity of the banking system to fund a limited-coverage deposit insurance scheme. If the banking system is unable to fund the cost of the blanket guarantee, government funding may be needed.
Funding
Principle 11 – Funding
A deposit insurance system should have available all funding mechanisms necessary to ensure the prompt reimbursement of depositors’ claims including a means of obtaining supplementary back-up funding for liquidity purposes when required. Primary responsibility for paying the cost of deposit insurance should be borne by banks since they and their clients directly benefit from having an effective deposit insurance system.
For deposit insurance systems (whether ex-ante, ex-post or hybrid) utilising risk-adjusted differential premium systems, the criteria used in the risk-adjusted differential premium system should be transparent to all participants. As well, all necessary resources should be in place to administer the risk-adjusted differential premium system appropriately.
Essential criteria
1. Funding arrangements for the deposit insurance system are provided on an ex-ante or an ex-post basis or some (hybrid) combination of these and are clearly defined and established in law or regulation.
2. Funding arrangements for the deposit insurance system ensure the prompt reimbursement of depositors’ claims and include a pre-arranged and assured source(s) of back-up funding for liquidity purposes. Such sources may include a funding agreement with the central bank, a line of credit with the government treasury, or another type of public fund or market borrowing. If market borrowing is used by the deposit insurer it should not be the sole source of back-up funding. The deposit insurer should not be overly dependent on a line of credit from any single private source.
3. Primary responsibility for funding the deposit insurance system is borne by member banks and is enforceable by the deposit insurer.
4. If an ex-ante deposit insurance fund is established the size of the fund (eg the fund reserve ratio) is defined on the basis of clear, consistent and well-developed criteria
18 Core Principles for Effective Deposit Insurance Systems - Assessment methodology
that aim at meeting the public policy objectives. If an ex-post funding arrangement is used the main source of funding is credible and readily available.
5. The deposit insurance fund has sound investment policies and procedures, internal controls and disclosure and reporting systems. These are approved by the deposit insurer’s governing body and subjected to regular review by an independent party. Investment policies emphasise the need to ensure the preservation of fund capital and liquidity.
6. For deposit insurers that use risk-adjusted differential premium systems:
(a) the system for calculating premiums is transparent to all participants;
(b) the ratings and rankings resulting from the system pertaining to individual member banks are kept confidential; and
(c) policymakers ensure that the deposit insurer has the necessary authority, resources and information in place to carry out its responsibilities with regard to the operation of such systems.
7. In so far as the funds of the deposit insurer may be used by other members of the safety net for the purposes of depositor protection and/or bank resolution, those circumstances are clearly stated and public and known to member banks. The deposit insurer has adequate information to:
(a) understand the use of the funds;
(b) seek reimbursement for the estate of the failed bank or participate in recoveries from the bank;
(c) restrict the resolution or depositor reimbursement amount to the costs the deposit insurer would otherwise have incurred without such intervention or resolution.
Public awareness
Principle 12 – Public awareness
In order for a deposit insurance system to be effective it is essential that the public be informed on an ongoing basis about the benefits and limitations of the deposit insurance system.
Essential criteria
1. The deposit insurer is responsible for promoting public awareness of the deposit insurance system and how the system works, including its benefits and limitations, on an on-going basis.
2. The objectives of the public awareness programme are clearly defined and consistent with the public policy objectives and mandate of the deposit insurance system.
3. The public awareness programme or activities convey information about the following:
Core Principles for Effective Deposit Insurance Systems - Assessment methodology 19
(a) which financial instruments are covered by deposit insurance and which are not (eg whether the system covers foreign deposits);
(b) which financial institutions offer insured deposits and how they can be identified;
(c) deposit insurance coverage limits and the potential for losses on deposits in excess of those limits; and
(d) the reimbursement process – how, when and where depositors may file claims and receive reimbursements in the event of a bank failure.
4. There is an effective contingency planning process for public awareness and communication that addresses plausible future scenarios and that involves the cooperation and coordination of other safety-net participants as appropriate.
5. The deposit insurer works closely with member banks and other safety-net participants to ensure consistency in the information provided and to maximise awareness on an ongoing basis.
6. The deposit insurer receives or conducts a regular evaluation of the effectiveness of its public awareness programme or activities.
Additional criterion
1. The public awareness program is tailored to the needs of clearly defined target audience and utilises a variety of communication tools. The desired level of visibility and awareness among the target audiences is a primary factor in determining the budget for the public awareness programme.
Selected legal issues
Principle 13 – Legal protection
The deposit insurer and individuals working for the deposit insurer should be protected against lawsuits for their decisions and actions taken in “good faith” while discharging their mandates. However, individuals must be required to follow appropriate conflict-of-interest rules and codes of conduct to ensure they remain accountable. Legal protection should be defined in legislation and administrative procedures, and under appropriate circumstances, cover legal costs for those indemnified.
Essential criteria
1. The deposit insurer and individuals working for the deposit insurer are protected against lawsuits for their decisions and actions taken in “good faith” while discharging their mandates.
2. Individuals are required to follow appropriate conflict-of-interest rules and codes of conduct to ensure they remain accountable.
3. Legal protection is defined in legislation and administrative procedures, and under appropriate circumstances, cover legal costs for those indemnified.
20 Core Principles for Effective Deposit Insurance Systems - Assessment methodology
Additional criterion
1. Legal protections do not prevent depositors or other individual claimants, or member banks from making legitimate challenges to the acts or omissions of the deposit insurer in public or administrative review (eg civil action) procedures.
Principle 14 – Dealing with parties at fault in a bank failure
A deposit insurer, or other relevant authority, should be provided with the power to seek legal redress against those parties at fault in a bank failure.
Essential criteria
1. The conduct of parties responsible for or who contributed to the failure of a bank (eg officers, directors, managers, auditors, asset appraisers and related parties of the failed bank) are subject to investigation by the deposit insurer or other relevant national authority. The investigation of the conduct of such parties may be carried out by one or more of the following: the deposit insurer, supervisor or regulatory authority, criminal or investigative authorities, or a professional or disciplinary body, as applicable.
2. If identified as culpable for the failure of a bank, such parties are subject to sanction and/or redress. Sanction or redress may include personal or professional disciplinary measures (including fines or penalties), criminal prosecution, and civil proceedings for damages
Failure resolution
The deposit insurer may, but often does not, perform many or most of the roles identified in Core Principles 15 and 16. However, it is essential that one or more of the financial safety-net participants performs these roles.
Principle 15 – Early detection and timely intervention and resolution
The deposit insurer should be part of a framework within the financial system safety net that provides for the early detection and timely intervention and resolution of troubled banks. The determination and recognition of when a bank is or is expected to be in serious financial difficulty should be made early and on the basis of well defined criteria by safety-net participants with the operational independence and power to act.
Essential criteria
1. The deposit insurer is part of a framework within the financial system safety net that provides for the early detection and timely intervention and resolution of troubled banks (failure resolution framework).
2. The failure resolution framework is established by law or regulation, and is effective at the early detection and timely intervention and resolution of troubled banks. The failure resolution framework is insulated against legal actions that aim at the reversal of early and timely decisions related to corrective procedures, interventions and resolutions of troubled banks. Core Principles for Effective Deposit Insurance Systems - Assessment methodology 21
3. The safety-net participants have the operational independence and power to perform their respective roles in the failure resolution framework and a clearly defined early intervention mechanism exists (including resolution tools) to ensure that appropriate action is taken (to allow the orderly resolution of a troubled bank) by the responsible party without delay.
4. The failure resolution framework includes a set of criteria that are used to identify banks that are or are expected to be in serious financial difficulty and are used as a basis to initiate some form of early intervention or corrective action to reduce the likelihood that a resolution would be necessary. Such action should minimise losses to the deposit insurance fund.
(a) The criteria are clearly defined in law or regulation and are well understood by banks and their stakeholders; and
(b) The criteria will be country specific and may reflect concerns about a bank’s capital, liquidity, and asset quality, among other factors.
Additional criterion
1. A mechanism exists to review decisions taken with respect to the early detection and timely intervention and resolution of troubled banks.
Principle 16 – Effective resolution processes
Effective failure-resolution processes should: facilitate the ability of the deposit insurer to meet its obligations including reimbursement of depositors promptly and accurately and on an equitable basis; minimise resolution costs and disruption of markets; maximise recoveries on assets; and, reinforce discipline through legal actions in cases of negligence or other wrongdoings. In addition, the deposit insurer or other relevant financial system safety-net participant should have the authority to establish a flexible mechanism to help preserve critical banking functions by facilitating the acquisition by an appropriate body of the assets and the assumption of the liabilities of a failed bank (eg providing depositors with continuous access to their funds and maintaining clearing and settlement activities).
Essential criteria
1. The overall national legal framework ensures the effective and timely functioning of the failure resolution framework, permitting the orderly liquidation of the bank, the payout or transfer of insured deposits and the intervention by a receiver to carry out the resolution functions.
2. The mandate of the deposit insurer or other safety-net participants allows for the effective resolution of banks of all sizes.
3. Bank resolution and depositor protection procedures are not limited to depositor reimbursement. The deposit insurer or other safety-net participant has effective resolution tools designed to help preserve critical bank functions, to achieve a transfer of accounts or assets/businesses and/or maintain continuity of banking services.
4. Where no single authority is responsible for all resolution processes, the mandate, roles and responsibilities of each safety-net participant is clearly defined and formally specified.
22 Core Principles for Effective Deposit Insurance Systems - Assessment methodology
5. One or more of the resolution procedures allows the flexibility for resolution at a lesser cost than otherwise likely on a depositor reimbursement in a liquidation.
6. A clear and well-sustained methodology is available to the deposit insurer or other safety-net participant to provide for the transfer of insured deposits to stronger banks.
7. Resolution procedures clearly ensure that bank shareholders take first losses.
Principle 17 – Reimbursing depositors
The deposit insurance system should give depositors prompt access to their insured funds. Therefore, the deposit insurer should be notified or informed sufficiently in advance of the conditions under which a reimbursement may be required and be provided with access to depositor information in advance. Depositors should have a legal right to reimbursement up to the coverage limit and should know when and under what conditions the deposit insurer will start the payment process, the time frame over which payments will take place, whether any advance or interim payments will be made as well as the applicable coverage limits.
Essential criteria
1. The deposit insurer is able to reimburse depositors promptly after the deposit insurance system is triggered by law, contract or the relevant authority.12
2. The time frame for accomplishing the reimbursement process is prompt and clearly stated to meet the public policy objectives of protecting depositors and promoting public confidence and financial stability of the deposit insurance system . The time frame is made public.
(a) Depositors are provided information after the failure on when and under what conditions the deposit insurer will start the reimbursement process and when the process is expected to be completed;
(b) Information on coverage limits, scope of coverage and whether advance or interim payments will be made is provided; and
(c) If there is an interest-bearing account, the deposit insurer shall reimburse depositors for interest as provided by contract, law or regulation up until at least the date the deposit insurance obligation is triggered.
3. In order to promptly reimburse depositors, the deposit insurer has:
(a) Access to necessary data, including deposit account records, to prepare for reimbursing depositors as soon as the supervisor is aware of a likelihood of failure.
(b) The power to review in advance by itself (or by request from the supervisory authority) the way depositor records are kept by banks to ensure the reliability of records, to reduce the time needed for calculation and verification of depositors’ claims;
12 A prompt reimbursement is defined to be when depositors are reimbursed within a time frame that does not undermine financial stability and the proper functioning of payment systems.
Core Principles for Effective Deposit Insurance Systems - Assessment methodology 23
(c) A range of payment methods for reimbursing depositors; and
(d) Access to adequate and credible sources of funding (eg reserve fund, Ministry of Finance, central bank) to meet its obligations under the established time frames.
4. The deposit insurer has the capacity to carry out the reimbursement process in a timely manner, including:
(a) Adequate information technology; and
(b) Adequate personnel (in-house or contractor).
5. In situations where there may be extended delays in reimbursements, the deposit insurer can make advance, interim or emergency partial payments.
Additional criteria
1. The deposit insurer has contingency plans as well as regularly scheduled tests of its systems.
2. The reimbursement process is audited by an independent auditor or authority.
Principle 18 – Recoveries
The deposit insurer should share in the proceeds of recoveries from the estate of the failed bank. The management of the assets of the failed bank and the recovery process (by the deposit insurer or other party carrying out this role) should be guided by commercial considerations and their economic merits.
Essential criteria
1. If the deposit insurer plays a role in the recovery process, its role is clearly defined in law or regulation and the deposit insurer maximises recoveries to the extent that it can from the failed bank on a commercial or economic basis.
2. The deposit insurer shares in the proceeds of the recoveries arising from the failure of its member banks. The deposit insurer is clearly recognised as a creditor of the failed bank for the reimbursement of losses and costs it incurs; and receives recoveries from the estate of the failed bank directly.
3. The deposit insurer has at least the same or comparable creditor rights or status as a depositor in the conduct of the estate of the failed bank, and has access to information to make and pursue its recovery claim against the estate and to exercise the appropriate degree of influence on the conduct of the estate.
4. If, in addition to creditor status, the deposit insurer is the receiver/liquidator/ conservator of the failed bank or of only some assets of the failed bank, then:
(a) the role played by the deposit insurer for asset management and recovery is clearly defined in law or regulation; and
24 Core Principles for Effective Deposit Insurance Systems - Assessment methodology
(b) its asset management and recovery approaches are guided by such factors as: the quality of the assets, market conditions, expert advice, and any legal requirements. 13
5. In determining the asset management and recovery approaches, the interests of all creditors are given appropriate weight and decisions on asset disposal are made using concepts such as net present value to balance the competing goals of securing maximum value and early disposal.
Additional criterion
1. The deposit insurer is entitled or authorised to be a member of the committee of creditors to follow the liquidation process of the failed bank as it is usually subrogated to the rights of the insured depositors.
13 In some circumstances the deposit insurer may seek to pursue the parties responsible for fraud or misconduct even though costs may exceed recoveries.
Core Principles for Effective Deposit Insurance Systems - Assessment methodology 25
Annex 1
Evaluation of compliance with Core Principles for Effective Deposit Insurance Systems
This Annex presents guidance and a format for the organisation and methodology of the assessment reports that draws on the format used in the Basel Committee's Core Principles Methodology (Banking Supervision).14
The assessment report should include the following:

A general section that provides background information on the assessment conducted, including information on the organisation being assessed and the context in which the assessment is being conducted.

A section on the information and methodology used for the assessment.

Overview of the institutional and macroeconomic setting and market structure.

Review of the preconditions for effective deposit insurance systems.

A detailed Principle-by-Principle assessment, providing a description of the system with regard to a particular Principle, a grading or “assessment,” and a “comments” section (Table 1).

A compliance table, summarising the assessment results (Table 2).

A recommended action plan providing Principle-by-Principle recommendations for actions and measures to improve the deposit insurance system and practices (Table 3).
14 That format was recommended by the IMF and the World Bank for use by assessors in the context of Financial Sector Assessment Program (FSAP) or Offshore Financial Center Program (OFC) missions. In order to maintain comparability and consistency, this format was also recommended for standalone assessments or self-assessments by a country. See Core Principles Methodology (Banking Supervision) Annex.
26 Core Principles for Effective Deposit Insurance Systems - Assessment methodology
Assessment and Summary Tables
Table 1
Core Principles for Effective Deposit Insurance Systems Assessment Summary Table
Core Principle 1: (repeat verbatim text of Core Principle 1)
Description
Assessment
C, LC, MNC, NC, NA15
Comments
Core Principle 2: (repeat verbatim text of Core Principle 2)
Description
Assessment
C, LC,MNC, NC, NA
Comments
Repeating for all 18 Core Principles
Table 2
Summary Compliance with the BCBS-IADI Core Principles for Effective Deposit Insurance Systems Detailed Assessments
Core Principle
Grade
Comments
Reference Core Principle 1
C, LC, MNC, NC, NA
Repeat for all Core Principles
C, LC, MNC, NC, NA
15 Compliant (C), Largely Compliant (LC), Materially Non-Compliant (MNC), Non-Compliant (NC), Not Applicable (NA) Core Principles for Effective Deposit Insurance Systems - Assessment methodology 27
Table 3
Recommended Action Plan to Improve Compliance with the BCBS-IADI Core Principles for Effective Deposit Insurance Systems
Reference Principle
Recommended Action
Core Principle a
Description of deficiency
Suggested course of action
Core Principle b
Description of deficiency
Suggested course of action
Etc.
Etc.
28 Core Principles for Effective Deposit Insurance Systems - Assessment methodology
Annex 2
Bibliography
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———, Core Principles Methodology, Basel, 2006b. http://www.bis.org/publ/bcbs130.htm
Blair, Christine E., Frederick Carns, and Rose M. Kushmeider, Instituting a Deposit Insurance System: Why? How?, Journal of Banking Regulation, 8, no.1:4–19, 2006.
Financial Stability Forum (FSF), Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience, Basel, 2008. http://www.fsforum.org/publications/r_0804.pdf
———, Guidance for Developing Effective Deposit Insurance Systems: Final Report of the Working Group on Deposit Insurance, Basel, 2001. http://www.iadi.org/docs/FSF_Final_Report.pdf
———, Situational Analysis: Conditions and Implementation Considerations: Discussion Paper of the Working Group on Deposit Insurance, Basel, 2001. http://www.fdic.gov/deposit/deposits/international/guidance/guidance/situationalanalysis.pdf
International Association of Deposit Insurers (IADI), Draft Discussion Paper on Deposit Insurance Coverage, Basel, 2008. http://www.iadi.org/docs/IADI%20Draft%20Discussion%20Paper%20on%20Deposit%20Insu rance%20Coverag_Basel_2008a.pdf
———, Draft Discussion Paper on Effective Deposit Insurance Mandate, Basel, 2007. http://www.iadi.org/docs/IADI%20Draft%20Discussion%20Paper%20on%20Effective%20De posit%20Insurance%20Mandate_Basel_2007a.pdf
———, General Guidance for Developing Differential Premium Systems, Basel, 2005a. http://www.iadi.org/docs/IADI_Diff_prem_paper_Feb2005.pdf
———, General Guidance for the Resolution of Bank Failures, Basel, 2005b. http://www.iadi.org/docs/Guidance_Bank_Resol.pdf
———, Guidance on Public Awareness of Deposit Insurance Systems, Basel, 2009a. http://www.iadi.org/docs/Public%20Awareness%20Final%20Guidance%20Paper%206_May_2009.pdf
———, Guidance on the Funding of Deposit Insurance Systems, Basel, 2009b. http://www.iadi.org/docs/Funding%20Final%20Guidance%20Paper%206_May_2009.pdf
———, Guidance on the Governance of Deposit Insurance Systems, Basel, 2009c. http://www.iadi.org/docs/Governance%20Final%20Guidance%20Paper%206_May_2009.pdf Core Principles for Effective Deposit Insurance Systems - Assessment methodology 29
———, General Guidance to Promote Effective Interrelationships Among Safety-Net Participants, Basel, 2006. http://www.iadi.org/docs/Guidance_Interrelationship.pdf
———, Key Conclusions of the APEC Policy Dialogue on Deposit Insurance and IADI Guidance Points, Basel, 2005c. http://www.iadi.org/docs/IADI_APEC_Guidance.pdf
30 Core Principles for Effective Deposit Insurance Systems - Assessment methodology
Annex 3
Recommended assessment process for review of the preconditions for effective deposit insurance systems
This section should provide an overview of the preconditions for effective deposit insurance, as described in the Basel/IADI Core Principles document. These preconditions include:

• an ongoing assessment of the economy and banking system;

• sound governance of agencies comprising the financial system safety net;

• strong prudential regulation and supervision; and

• a well-developed legal framework and accounting and disclosure regime.
Assessors should pay close attention to the adequacy of preconditions. This section requires a succinct and well structured factual review of preconditions, as experience has shown that insufficient implementation of the preconditions can have a direct effect on the deposit insurer’s ability to fulfil its mandate. It is important that the reader of the assessment report is able to properly interpret the grading of the individual Principles in light of the way in which the preconditions are met. The review of the preconditions should strictly follow the headings indicated above, and provide the necessary factual information to give a clear view to the reader of the assessment of the Core Principles. The assessment of compliance with individual Principles could flag the Principles which are likely to be primarily affected by preconditions considered to be weak, after factoring in specific country circumstances, mandate and structures of the deposit insurance system. However, standards assessors should not undertake to assess preconditions themselves. The review normally should take up no more than one or two paragraphs for each type of precondition.
Ongoing assessment of the economy and banking system
In particular with regard to the presence of an ongoing assessment of the economy and banking system, the review of the preconditions should be descriptive, including the frequency with which policy makers conduct an analysis of the macroeconomic environment in the country (including current monetary and fiscal policy, and the soundness of the banking system), and should not express an opinion on the adequacy of policies in these areas, other than through reference to the analysis and recommendations in existing IMF and World Bank documents, such as Article IV, FSAs, FSSAs and other Bank and Fund program-related reports.
Also with regard to other components of the preconditions, the reviewers should rely to the greatest extent possible on official Fund and Bank documents and seek to ensure that the description and possible recommendations are consistent with other Fund and Bank positions on these issues.
When relevant, the assessors should attempt to include in their analysis the linkages between these factors and the ability of the deposit insurance system to achieve its objectives.
Core Principles for Effective Deposit Insurance Systems - Assessment methodology 31
Sound governance of agencies comprising the financial system safety-net
A review of sound governance of agencies comprising the financial safety-net should focus on elements relevant to the deposit insurance system and, where appropriate, rely on the assessment made on other safety-net participants by other specialists on the mission and the Fund/Bank country teams. This part of the review of the preconditions should be combined with an analysis of: (i) coordination; (ii) formal arrangements (ie MOUs) to ensure timely information sharing and cooperation; (iii) alignment of mandates with the institutional settings and public-policy objectives; and (iv) consistency of integrity and transparency policies of safety-net participants.
Review of prudential regulation and supervision
An overview assessment of the strength or robustness of the prudential regulation and bank supervision (fundamentally relying on assessment reports prepared by the IMF/WB missions and peer group exercises) should focus on issues that could have direct implication for the effectiveness of the deposit insurance. The overview assessment should also cover the following elements: an analysis of the functions of the key entities involved such as the Central Bank, supervisory authority and the deposit insurer. Any duplicative or overlapping functions should be noted as well as any apparent gaps in the responsibilities. This should be followed by a review of the existence of a well-defined and documented process for dealing with the situation of a failing/failed financial institution.
Assessment of the legal framework and accounting and disclosure regime
On the basis of Reports on the Observance of Standards and Codes (ROSCs), FSSAs, FSAs and other reports by the IMF/WB or other international institutions , the assessor would form an opinion on the existence of proper legal framework by focusing on issues such as rules on corporate governance; protection of shareholders’ rights; availability of market and consumer information; consumer protection laws; privacy and disclosure laws; professional liability laws to enable legal actions against bank directors and managers; indemnification laws to protect supervisory/regulatory staff; legal framework for mergers, takeovers and acquisition of equity interests; laws governing foreign entry into the market; bankruptcy laws; contract laws; general property rights; mechanisms for fair dispute resolution; and disclosure of government ownership and influence in financial institutions.
Relying on the sources discussed above the review of the existing accounting and disclosure regime could include: presence of reliable and well trained accounting and auditing professions; financial sector regulations; efficient payment, clearing and settlement systems; transparency and public disclosures of financial statements; and adherence to generally accepted accounting and auditing standards.
32 Core Principles for Effective Deposit Insurance Systems - Assessment methodology
Annex 4
Role of deposit insurance system in crisis preparedness and a systemic crisis
This section describes certain activities generally outside the deposit insurance system’s purview. It also deals with the desired coordination between the deposit insurance system and other safety-net participants during a systemic crisis.
The objectives of deposit insurance systems are relatively simple; consisting of protecting depositors and contributing to financial stability. In normal times, an adequately funded deposit insurance system should be able to promptly reimburse a large number of insured depositors for a reasonable quantity of small bank failures, thus helping to preserve confidence in the rest of the banking system.
However, a deposit insurance system has a number of limitations during systemic crises. Most deposit insurance systems lack the mandate and powers to deal with a systemic crisis.16 As with virtually all insurance endeavours, a deposit insurance system, by design, can absorb only a few losses among its insured pool. During systemic crises, when a large segment, or even all, of the banking sector is at risk of failure, a deposit insurance system lacks the resources to address the problem on its own. Unless other safety-net participants provide resources for crisis resolution, the deposit insurance system’ key objective of promoting confidence to market participants will be undermined.
Various countries are taking steps to ensure adequate preparedness to deal with systemic crises, primarily by adopting contingency planning for crisis preparedness. This is evaluated in FSAPs under the Financial Safety Nets section, along with lender-of-last-resort (LOLR) facilities, the legal and regulatory framework for effective problem bank resolution, and the role of the deposit insurance system. In brief, crisis preparedness is usually led by the Ministry of Finance or equivalent and includes the other safety net members (MOF should lead since the other safety-net participants are usually politically independent).
While positive, the adoption of crisis management arrangements is in some cases introducing areas of potential conflict between the deposit insurance system and the crisis management committee. For instance, in some cases the deposit insurance system funds are included as part of the funds available to deal with a systemic crisis. By law, most deposit insurance system funds are dedicated to reimburse insured depositors in case of bank failure, unless its use was already permitted by law, or was closely connected to the protection of depositors (such that costs did not exceed what the deposit insurer might otherwise have been called on to meet). If a government were to decide to use deposit insurance system funds for other uses, such as to recapitalise a bank, such use should only be at the government’s direction and carry a government guarantee that the deposit insurance system will be repaid.
16 For example, a deposit insurer provided with a wide mandate may have the power to resolve a bank, but be limited by a “least-cost” test; while the need for speed and/or systemic stability may preclude implementing the “least-cost” test.
Core Principles for Effective Deposit Insurance Systems - Assessment methodology 33
34 Core Principles for Effective Deposit Insurance Systems - Assessment methodology
Furthermore, the deposit insurer as a safety-net participant is sometimes not represented in crisis management during a systemic crisis. Generally, a crisis management committee will develop a coordinated communications strategy. This is an area where the crisis management committee could benefit from the deposit insurer’s experience in designing a message to promote confidence during normal times. Advance preparation of public communications is critical during a “normal” bank closing (eg Where/when will deposits be repaid? Must I continue making loan payments?); and it is even more critical to prepare in advance the most positive messages to respond to a crisis (eg Is my deposit safe?). A deposit insurer’s experience in promoting public confidence via effective public awareness campaigns can usefully contribute to the crisis management committee’s coordinated communication program; however, the deposit insurer should not unilaterally decide to handle communications during a crisis.17

Pay-As-You-Drive Insurance

Victoria Transport Policy Institute
Vehicles are safest when parked. PAYD encourages motorists to reduce vehicle travel, providing
many benefits.
Abstract
This paper provides guidance for implementing Pay-As-You-Drive (PAYD) vehicle
insurance, which directly incorporates mileage as a rate factor. It describes PAYD
pricing options, discusses PAYD benefits and costs, describes regulatory reforms,
evaluates various objections to PAYD, and provides specific recommendations for PAYD
implementation.
Various data sources indicate that crash costs increase with annual vehicle mileage. As
a result, PAYD increases actuarial accuracy (premiums better reflect a vehicle’s claim
costs). PAYD pricing rewards motorists when they reduce their mileage, providing
financial savings and additional benefits including increased safety, congestion reduction,
road and parking facility cost savings, energy conservation, emission reductions, and
increased insurance affordability. There are many possible ways to implement PAYD
insurance; some provide more benefits than others. Insurance regulators can maximize
benefits by defining performance standards that policies must meet to be considered
PAYD, as described in this paper. Critics raise various objections to PAYD pricing, but
many of these are technically inaccurate or can be addressed with appropriate
implementation practices.
Pay-As-You-Drive Insurance – Recommendations for Implementation
Victoria Transport Policy Institute
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Introduction
Pay-As-You-Drive (PAYD, also called Distance-Based, Usage-Based and Per-Mile
Pricing) means that vehicle insurance premiums are directly based on the number of
miles a vehicle is driven during the policy term.1 This paper describes PAYD concepts,
explores its impacts and requirements, describes factors to consider when establishing a
PAYD product rating system, and provides recommendations for implementation.2
Many organizations are investigating ways to implement PAYD insurance to achieve
various planning objectives, including increased affordability, consumer savings, traffic
safety and emission reductions (CDI 2008; Mills 2009; NAF 2009).
Several insurance companies now offer PAYD products:
Aioi Insurance (www.ioi-sonpo.co.jp), Japan
Aryeh (www.aryeh.co.il), Israel
Holland PAYD Coverage (www.payasyoudrive.co.za), South Africa
MileMeter (www.milemeter.com), United States
MiDriveStyle (www.miway.co.za/midrivestyle)
Pago Por Uso (www.jovenesdesiguales.com), Spain
PAY PER K Coverage (www.nedbank.co.za), South Africa
Polis Vor Mij ("Policy for me") (www.PolisVoorMij.nl), The Netherlands
Polis Direct Kilometre Policy (www.kilometerpolis.nl), The Netherlands
Progressive, MyRate (www.progressive.com/MyRate/myrate-default.aspx), USA
Real Insurance PAYD (www.payasyoudrive.com.au), Australia
Many North American insurance companies are considering or testing PAYD pricing.
According to a survey 115 insurance companies, 66 indicated that they had considered
offering PAYD products, two planned to offer such products by mid-2009, and twelve
planned to do so before the end of 2009 (Exigen 2008). The top market driver for PAYD
introduction was readiness to respond to protect their book of business from competitors.
Entering a new market to grow revenue was second ahead of entering the market to gain
market perception as exercising corporate responsibility with a “green” product.
At least one major new PAYD pilot project will be implemented in 2010. King County
Metro, the Washington State Department of Transportation, other partner agencies, and
the Unigard Insurance Company of Bellevue, Washington are developing a PAYD
product that will be tested by at least 5,000 motorists (Metro 2007).
This all suggests that PAYD insurance will become increasingly important in the near
future.
1 Although this paper refers to miles and mileage, the same concepts can be applied to comparable units of
vehicle use, including vehicle-kilometers, and possibly vehicle-minutes of use.
2 For more detailed descriptions of PAYD see Butler (1992); Litman (1997 and 2001); Edlin (1999);
Harrington and Parry (2005); and Bordoff and Noel (2008).
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Pay-As-You-Drive Concepts
PAYD insurance reflects the principle that prices should reflect costs, and consumers
who reduce costs should receive resulting savings. Reduced driving reduces crash risk
and insurance claims. With current pricing, claim cost savings that result when motorists
reduce mileage are retained as profits by insurers or returned to premium payers as a
group. PAYD pricing return these savings to individual motorists who reduce mileage.
Motorist Reduces Mileage
􀃘
Reduced Crashes
􀃘
Insurance Cost Savings
PAYD pricing returns to individual motorists the insurance cost savings that result
when they drive less. It rewards motorists for reducing mileage and makes
premiums more accurately reflect the insurance costs of each individual vehicle.
PAYD pricing gives motorists a new opportunity to save money, providing an incentive
to reduce mileage, allowing individual consumers decide which miles, if any to forego.
Any vehicle-miles reduced consist of lower-value vehicle travel that motorists willingly
give up in exchange for savings, increasing their consumer surplus. For example, at 5¢
per mile, motorists would continue driving vehicle miles that they value more than this
amount but forego vehicle-miles that they value less than this amount. To the degree that
motorists reduce mileage, and therefore crashes and insurance claims, the savings that
result are net benefits to society, not just economic transfers.
Figure 1 Crash Rates by Annual Vehicle Mileage (Litman 2001)
0.00
0.02
0.04
0.06
0.08
0.10
<5
5- <1 0
10- <1 5
15- <20
20- <25
25- <30
Annual Vehicle Kilometres (1,000s) Crash-Related Claims Per Year
Total
Non-Culpable
Culpable
Casualty
Annual insurance claims tend to increase with annual vehicle travel.
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In recent years researchers have gained better information about the relationships
between vehicle mileage, crashes and insurance claims. New data (such as mileage data
collected during vehicle emission inspections matched to insurance claim records of
individual vehicles) show a strong positive relationship between mileage and crashes, as
illustrated in Figure 1.3 Even comprehensive claims (theft, vandalism and weather
damage) tend to increase with annual mileage (Litman (2001).
There are confounding factors that affect mileage and crash rates. For example, young
and old drivers, people with disabilities, and urban residents who do more driving on
surface streets, tend to drive lower annual mileage and have higher per-mile crash rates.4
However, these factors can be incorporated into rating, either directly or by surrogates
such as driving experience. Once these are taken into account (that is, for a given rate
class) there is a strong positive relationship between mileage and crashes.
The relationship between mileage and claims is probably even stronger than Figure 1
indicates due to differences between mileage and claims within these large mileage
classes, and other confounding risk factors that cannot be perceived until mileage is
directly applied as a rating factor (Litman 2001). For example, within the 5,000-10,000
annual mileage range for a particular rate class, motorists who drive 9,000-10,000 may be
fitter and drive proportionately more miles on grade-separated highways than those who
only drive 5,000-6,000. Once actuaries have experience with PAYD pricing they will
have better data for calculating more accurate PAYD rates.
Available data suggest that a change in overall average vehicle travel (that is, travel that
includes an equal mix of high- and low-risk vehicle-miles) provides about proportional
change in claim costs by those vehicle’s insurers, and proportionally larger reductions in
total crash costs since about 70% of crashes involve multiple vehicles and the average
crash results in about 1.5 claims (Vickrey 1968; Edlin 2003). As a result, each vehicle
removed from traffic reduces both its chances of causing a crash and of being the target
of a crash caused by another vehicle, and each avoided multi-vehicle crash reduces
multiple claims. Thus, if most vehicles in an area shift to PAYD premiums, the resulting
reduction in total crashes and claim costs should be proportionately larger than the
reduction in mileage (a 10% mileage reduction is estimated to provide a 12-15%
reduction in total crashes).
3 For detailed information on the relationships between mileage and crash rates see Litman (2001); Edlin
and Mandic (2001); Litman and Fitzroy (2005); and Bordoff and Noel (2008).
4 Urban miles tend to have relatively high per-mile crash rates but low fatality rates.
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Benefits and Costs
PAYD can provide these benefits (Litman 1997; Funderberg, Grant & Coe 2003; Bordoff
and Noel 2008):
• Increased actuarial accuracy. It makes premiums more accurately reflect the insurance costs
of an individual vehicle, which is fairer and more economically efficient.
• Consumer savings. With PAYD pricing average motorists are expected to reduce their annual
mileage, crashes and insurance costs by about 10%, providing about $100 annual savings.
• Increased insurance affordability (Litman 2004). Since annual vehicle travel tends to increase
with income, most lower-income motorists would save.5
• Increased traffic safety (Perry 2004). Mileage reductions reduce exposure and traffic density,
and therefore total crashes. Higher risk motorists pay more per vehicle-mile and therefore
have a larger incentive to reduce mileage, providing additional crash reductions. If broadly
applied, traffic crashes should decline proportionately more than mileage, so for example, a
10% mileage reduction reduces crashes 12-15% (Edlin and Mandic 2006).
• Reduced traffic congestion, roadway and parking facility costs.
• Energy conservation and pollution emission reductions (CCAP 2005; Harrington and Parry
2005). If applied to all vehicles it can achieve approximately a third of the Kyoto emission
reduction targets for private vehicles.
• By increasing affordability it should reduce uninsured driving (Butler 2000).
PAYD implementation can also impose some costs:
• It requires new rate structures, administrative procedures and rate plans. Insurers bear these
costs when rate structures change, but PAYD could increase these costs more than average.
• Most PAYD systems increase transaction costs (administrative costs per policy). Incremental
costs range from less than $0 per vehicle-year for self-reporting systems (MileMeter 2009), to
more than $150 per vehicle-year for pricing systems that track vehicle location.
• Until insurers gain experience with this rate structure there will be uncertainties about risks
and therefore how to structure rates.
• It can make premiums less predictable to consumers. Motorists and insurers would not know
total premiums until the end of the insurance term.
• If universally implemented it may increase premiums for some motorists (those who continue
to drive high annual miles in their rate class), although most motorists should save money.
Most motorists should benefit overall, including those who currently drive less than
average in their rate class, those who would reduce their mileage to below average in
response to this incentive, those who drive uninsured but would purchase insurance if
offered PAYD, and motorists who drive high annual miles but value benefits such as
reduced traffic congestion, accident risk and pollution emissions.
5 Most low-income motorists drive less than 12,000 annual miles and so would save with PAYD pricing.
Pay-As-You-Drive Insurance – Recommendations for Implementation
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Potential Price Structures
Various PAYD insurance pricing options are discussed below.
1. Mileage Rate Factor (MRF)
PAYD can be implemented by incorporating annual mileage as a rating factor into
premiums. Many insurers do offer small discounts for motorists who drive less than
certain levels (such as 7,000 annual miles). However, these are currently based on
motorists’ self-reported estimates of their expected future mileage; since motorists cannot
predict with certainty how much they will drive and there is no verification or adjustment
at the end of the policy term, motorists significantly underestimate their annual mileage.6
As a result, Mileage Rate Factor is currently inaccurate and can only apply a small
portion of the actuarially justified weight on mileage.
The Mileage Rating Factor system can be improved by adding more mileage bands (such
as every hundred miles),7 verifying mileage based on a third party odometer reading,8 and
adjusting premiums at the end of the policy term, with a rebate to motorists who drove
less than the number of miles they paid for, and a surcharge to motorists who drove more.
This requires a mechanism to insure that motorists actually pay such surcharges.
2. Per-Mile Premiums (PMP)
This means that vehicle insurance is sold by the vehicle-mile rather than the vehicleyear.
9 Other rating factors are incorporated, so higher-risk drivers pay more per mile than
lower-risk vehicles. For example, a $500 annual premium becomes 4¢ per mile and a
$1,000 annual premium becomes 8¢ per mile, for vehicles in a rate class that averages
12,000 annual miles.
Figure 1 suggests that marginal crash rates vary over the mileage range. This may justify
marginally declining per-mile premiums, so, for example, the first 5,000 annual miles
could be priced at 10¢ per vehicle-mile, the second 5,000 at 8¢ per vehicle-mile, the third
5,000 miles at 6¢ per vehicle miles, and miles over 15,000 annual miles at 5¢ per vehiclemile.
However, many factors that contribute to the declining marginal crash rate can be
incorporated directly into this price structure so the need for marginally declining rates
should decline as insurers gain experience with PAYD pricing.
With this system, motorists typically prepay for the miles they expect to drive during the
term. For example, some might pay for 15,000 miles at the start of the term, while others
might pay for just 5,000 miles at first and make additional payments as needed. Total
premiums are calculated at the end of the term based on recorded mileage. Vehicle
owners are credited for unused miles or pay any outstanding balance. Insurers would
6 Insurers typically find that more than half of all motorists claim to drive less than 7,500 miles per year,
although vehicles actually average about 12,000 miles (Butler, Butler and Williams 1998).
7 Since PAYD typically causes modest mileage reductions, mileage bands must be small so a typical
motorist perceives an opportunity to save money.
8 Current California insurance law allows insurers to request mileage verification data, but may not require
third-party odometer readings, so the resulting data are unverified and unreliable.
9 In other words, this converts the unit of exposure from the vehicle-year to the vehicle-mile or comparable
units such as the vehicle-kilometer or vehicle-minute.
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probably require purchase of a minimum number of miles per policy to insure that their
transaction costs are recovered. There are several possible approaches to coverage,
depending on regulatory requirements and pricing practices:
A. Coverage only on prepaid miles/minutes. For example, if a vehicle owner pays for 5,000
miles, they have no coverage at 5,001 miles. This is the simplest approach and is appropriate
for optional coverage, but could result in uninsured driving.
B. Coverage regardless of prepayment. Once a driver makes a minimum payment they have
coverage for the policy term and pay for any outstanding miles at the end of the term. For
example, at the start of the term a motorist might pay for 5,000 miles of coverage but drive
15,000 miles. At the term end they must pay for the outstanding 10,000 miles. This requires a
mechanism to insure that motorists pay outstanding fees, such as a bond or credit card charge
that can be invoked if no final odometer reading is recorded, and requirements that
outstanding insurance miles be paid before a vehicle can be reinsured and reregistered.
C. Coverage regardless of prepayment, with late payment penalties. This combines options A
and B. Coverage is provided for all travel during the policy term but claims on unpaid miles
have financial penalties, or post-payment have a surcharge. For example, deductibles could
double for claims that occur past the prepaid number of miles, or miles paid after the end of
the policy term have a 10% surcharge (6.0¢/mile would cost 6.6¢ if paid after the term). This
also requires a mechanism to insure that motorists pay for outstanding mileage.
D. Motorists initially pay premiums as they do now, but receive rebates for mileage below a
certain level. For example, they could receive 8¢ for each mile below 12,000 annual miles.
However, once motorists reach the threshold they have no incentive to reduce mileage.
Per mile premiums may require odometer auditing to collect accurate vehicle-mileage
data. Odometer audits would be performed when a vehicle’s insurance is renewed, in
most cases annually. Audits involve these steps:
1. Check speedometer and instrument cluster for indications of tampering.
2. Record tire size and check that it is within the specified range.
3. Attach a small seal to the ends of mechanical odometer cables to indicate if it has been
removed. This is unnecessary on most newer vehicles with electronic speedometers.
4. Check odometer accuracy (this is optional and could be performed on a random basis).
5. Record odometer reading and forward results to the vehicle licensing agency.
Such audits typically take 5-10 minutes and less if performed with other vehicle
servicing, estimated to cost $5-15 per vehicle-year. Auditors could be certified by the
state (similar to certification for other vehicle services, such as emission inspecting), by
the insurance industry, or even by individual insurance companies. Some PAYD pricing
use various electronic systems to automatically report odometer readings.10
10 Such as Progressive’s MyRate system (www.progressive.com/MyRate/myrate-default.aspx).
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There are concerns that odometer fraud could be a problem, but most tampering can be
detected during audits and crash investigations, and fraud would void coverage.
Odometers are increasingly tamper-resistant. Odometer audits should provide data as
accurate as that used in other common commercial transactions and more accurate than
self-reported information now used for insurance pricing. Audits would provide
additional benefits, including accurate mileage data for used-vehicle buyers, and allows
other charges, such as registration fees, to become distance-based at minimal extra cost.
Per-Mile Premiums could be implemented as a consumer option. Motorists would choose
between vehicle-year and vehicle-mile premiums, just as consumers can now choose their
telephone service rates. Optional Per-Mile Premiums are likely to attract 25-50% of
policies during the first few years, with penetration increasing over time as it become
more competitive compared with vehicle-year pricing.
3. GPS-Based Pricing
This system uses GPS (Global Positioning System) transponders installed in vehicles to
price insurance based on time and location. For example, a motorist might pay 7¢ per
minute for urban-peak driving, 5¢ for urban-off-peak driving, and 3¢ per minute in rural
areas. This allows more actuarially-accurate pricing, but typically adds $150 or more in
annual costs for equipment, billing and royalties, and raises privacy concerns, although
such can be addressed by controlling vehicle location data management. Under most
proposals, GPS-based pricing would be a consumer option. It would tend to attract lowmileage
motorists, particularly those who want other GPS-based services and are
unconcerned about loss of privacy, probably 2-5% of current policies.
Summary
The table below summarizes the pricing options evaluated in this report.
Table 1 Summary of Distance-Based Pricing Options
Name Description
MRF Mileage Rate Factor is incorporated into premiums.
Per-Mile, Mandatory All vehicle insurance is priced by the mile or kilometer.
Per-Mile, Optional Motorists may choose between vehicle-year or vehicle-mile premiums.
GPS-Based Pricing
Motorists may choose to purchase insurance based on when and where they
drive using a GPS transponder installed in their vehicle.
This table summarizes the pricing options evaluated in the next section of this report.
Pay-As-You-Drive Insurance – Recommendations for Implementation
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PAYD Pricing Product Rating
Some PAYD products provide greater benefits than others. To minimize confusion and
maximize benefits it will be useful to develop a PAYD rating system similar to LEED
Building (NGBC 2009) and the Energy Star (USEPA 2009) standards.
Four factors are considered in the proposed ratings:
1. Mileage band size (smaller is better). Many policies use 100, 500 , or 1,000 mileage bands. The
smallest mileage band is a single vehicle-mile.
2. Minimum number of miles motorists must purchase (smaller is better). This insures that policy
transaction costs are repaid even for vehicles driven very low annual miles.
3. Percentage reduction in total premiums provided by a 50% reduction in annual mileage (larger
is better). This is based on the percentage reduction in total annual premiums (including
optional coverages such as fire and theft) provided by a reduction from 12,000 to 6,000 annual
miles (from 6,000 to 3,000 miles for a six-month policy).
4. If unit prices vary between mileage bands, maximum difference between highest and lowest prices in
a policy (smaller is better). For example, for a particular policy the first 5,000 annual miles could be
priced at 10¢ per vehicle-mile, the second 5,000 at 8¢ per vehicle-mile, the third 5,000 miles at 6¢
per vehicle miles, and miles over 15,000 annual miles at 5¢ per vehicle-mile. In this case the
maximum difference is two, since 10¢ is twice 5¢.
The ratings are:
Gold
Premiums are priced by the vehicle-mile, incorporating all existing rating factors. A
50% mileage reduction provides at least a 50% premium reduction. Insurers may
require up to 2,000 annual miles purchased. Unit prices may not vary by more than a
factor of two.
Silver
Maximum bands of 250 miles of driving. A 50% mileage reduction provides at least
a 40% premium reduction. Insurers may require the purchase of up to 3,000 annual
miles. Unit prices may not vary by more than a factor of 2.5.
Bronze
Maximum bands of 500 miles of driving. A 50% mileage reduction provides a 25%
premium reduction. Insurers may require the purchase of up to 4,000 annual miles.
Unit prices may not vary by more than a factor of 3.0.
Rating Summary
Rating Factors Gold Silver Bronze
Maximum mileage bands used for pricing 1 250 500
Maximum annual miles that must be purchased 2,000 3,000 4,000
Percentage premium reduction from a 50% mileage reduction 50% 40% 25%
Maximum difference between lowest to highest price unit 2 2.5 3
This table summarizes minimal performance requirements for PAYD ratings.
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Responses to Concerns About PAYD Insurance
This section discusses concerns that have been raised about PAYD pricing.
Insurance pricing already incorporates mileage.
Some insurance companies incorporate mileage-related rate factors such as commute distance or
estimated annual mileage, but none begins to approach actuarially accurate, marginal pricing, so
they fail to give motorists accurate price signals.
Mileage is less important in predicting crashes than other rating factors.
Insurance industry claims that annual mileage is not a significant risk factor are based on
inaccurate, self-reported data. New research based on independently-collected mileage data
shows a strong relationship between mileage and crashes. Whether mileage is more or less
important than other risk factors is irrelevant for PAYD pricing that incorporates other rating
factors. Although it would not be actuarially accurate to use mileage instead of other rating
factors, for example, to charge all motorists the same 6¢ per mile for insurance, actuarial accuracy
increases significantly if mileage is added to other rating factors, so for example, a lower-risk
motorist pays 3¢ per mile and a higher risk motorist pays 12¢ per mile.
Travel foregone could be lower risk than average, resulting in little crash reduction, and less
insurance cost savings than reduced premium revenue.
This concern is technically valid, although there is no evidence that it is true. Available evidence
indicates that PAYD reduces both high and low risk travel, and broad vehicle travel reductions
result in proportionally greater crash reductions and insurance savings. Additional research and
pilot projects that test the effects of distance-based pricing could address this concern.
PAYD pricing increases costs to low-income motorists.
PAYD provides significant savings and benefits to most lower-income motorists, including those
who currently drive less than average; those who drive somewhat more than average but will
reduce their mileage in response to this price incentive and so end up saving money; those who
currently drive uninsured because they cannot afford insurance; and those who currently cannot
afford to own an automobile due to high insurance costs, but can when PAYD becomes available.
Butler (2000) describes how fixed insurance pricing creates a spiral of rising premiums and
uninsured driving rates that harm low-income communities.
PAYD pricing unfairly increases costs to high-mileage drivers.
PAYD increases premiums for motorists who drive significantly more than average within their
rate class. This is justified on actuarial grounds, and so increases fairness. Most motorists save
money and benefit overall, particularly lower-income motorists, who tend to drive less than
average within their rate groups.
PAYD pricing unfairly increases costs to rural residents.
Since territory is a rate factor, only rural motorists who drive significantly more than the average
among rural residents would pay more. For example, motorists average 12,000 annual miles but
rural motorists average 15,000, rural residents who drive 14,000 annual miles would save money,
although this is more than the state average, because it is less than the rural average.
Automobile insurance reform should focus on equity, affordability and safety.
PAYD pricing helps achieve all of these goals. It increases equity by making premiums more
actuarially accurate. It allows motorists to save money, makes vehicle ownership more affordable,
and reduces costs for lower income motorists. It significantly increases road safety.
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Privacy Concerns
Some people fear that PAYD pricing invades motorists’ privacy (Troncoso, et al. 2007). However,
privacy is not a legitimate concern for PAYD pricing that is based only on vehicle mileage, since
this information is already collected frequently and available to consumers.11 Privacy concerns
are only a risk with GPS-based pricing which tracks when and where a vehicle is driven. Such
concerns can be addressed by controlling how data are processed and stored.12 Many motorists
choose to have GPS systems in their vehicles for navigation and emergency services. Privacy is
not a concern if PAYD pricing is a consumer option so individuals can decide what data they
share with insurers, or if it uses mileage data which indicate nothing about when and where a
vehicle is driven, and there are adequate controls over how data are processed and stored.
Consumers will not accept this change.
Market surveys and pilot projects indicate significant consumer demand for distance-based
pricing. A broad range of interest groups support PAYD pricing. Support should increase as
consumers and citizens learn more about this concept.
Odometer fraud will be a major problem.
Although some fraud may occur, it should be minor overall, with fraud rates comparable to other
common consumer transactions, and far lower than with current insurance pricing based on selfreported
predictions of future mileage. Odometers are increasingly tamper resistant, regular
odometer audits should discourage tampering, and the financial incentive for fraud is relatively
low. Insurers’ financial exposure would be minimal since odometer fraud voids coverage.
It increases administrative costs to insurers and inconvenience vehicle owners.
Although any price change adds short-term transition costs, these are minor, and tiny compared
with total benefits. Odometer audits should cost $5-$15, and less if performed in conjunction with
scheduled maintenance such as an oil change or emission inspection.
This type of pricing has never been used before.
Some vehicle insurance is already distance-based: rates for fleets and commercial vehicle
coverage are often based on mileage. Several insurers now offer PAYD policies. There is nothing
unique about pricing based on use. Prices for most goods are based on some measure of
consumption, such as water and electric meters, and scales used to weigh food. Vehicle rentals
and leases incorporate odometer-based price components. Vehicle insurance is unusual for having
pricing that allows unlimited consumption (i.e., vehicle mileage).
11 CarFax (www.carfax.com).
12 Such as Skymeter Corporation (www.skymetercorp.com)
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Table 3 summarizes various obstacles to PAYD implementation and potential solutions.
Some obstacles reflect misunderstandings about the concepts and so can be addressed by
information. Others obstacles reflect uncertainty and so can be addressed with pilot
projects that provide useful information and experience. Others may require regulatory
reform or incentives to encourage insurance companies to offer PAYD pricing.
Table 3 Obstacles and Potential Solutions
Obstacle Potential Solutions
Misunderstandings. Many objections to PAYD pricing
reflect misunderstandings of the concept. Some people
believe it refers to Pay-At-The-Pump (insurance
coverage funded through a fuel sales surcharge), are
unaware of its full potential benefits, or have
exaggerated estimates of its costs.
Educate stakeholders (policy makers, insurance
professionals, insurance regulators, consumers) about
PAYD, including how it would be implemented, and its
real benefits and costs.
Uncertainty. Current rate structures are based on claim
cost data collected by the vehicle-year. Although there
is ample evidence that mileage is an important risk
factor, actuaries have insufficient data to know exactly
how to calculate mileage-based premiums.
Begin with a relatively small pilot project, using a basic
prorated premium (i.e., current annual premiums divided
by average annual mileage for each rate class), with an
extra 5-15% margin to account for uncertainty. Adjust
this rate as needed as the pilot project provides data.
Data accuracy. PAYD requires accurate mileage data.
Self-reported data is unreliable.
Mileage data can be collected in many ways, including
self-reporting with spot checks, or odometer audits
performed by insurance brokers or service stations.
Exaggerated number of losers. Some people object to
PAYD because they believe it would harm many
groups, such as rural drivers (PAYD, as recommended
here, would only increase costs for rural motorists who
drive more than the average for rural motorists) or
businesses (premiums for business vehicles already
reflect their relatively high mileage).
Educate stakeholders about PAYD insurance real
distributional impacts. To the degree that it is effective at
reducing mileage and crash costs, most people should
benefit overall. Even high mileage drivers can benefit
overall due to reduced exposure to traffic congestion,
accident risk and pollution emissions, or if they want to
own multiple vehicles.
Regulatory constraints. Some insurance regulations
discourage pricing reforms. For example, regulators
often require insurers to provide data justifying rates,
and some prohibit insurers from offering multiple rate
structures. Regulations are complex and rate filings are
costly (often costing a million dollars or more in data
collection, analysis and paper works), which
discourages small, innovative pilot projects.
Educate insurance regulators concerning the merits of
PAYD with respect to insurance regulatory objectives.
Collect data showing the actuarial basis for PAYD.
Work with regulatory agencies to address specific
obstacles to innovation and small pilot projects. Identify
jurisdictions that have suitably supportive regulatory
policies. Pass legislation (as in Oregon and Texas) which
specifically allows PAYD insurance pricing.
Lack of incentive. Insurance companies currently
perceive little incentive to implement innovative
pricing options such as PAYD pricing.
Educate insurance professionals concerning ways to
profit from PAYD pricing (the first companies to offer
this product can attract new clients). Provide financial
incentives, such as tax breaks (as Oregon now does).
Pass laws requiring insurance companies to offer PAYD,
at least as an option. Fund PAYD research programs and
pilot projects. Favor insurance companies that offer
PAYD pricing in government contracts.
This table lists various obstacles to PAYD pricing, and potential solutions.
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Conclusions and Recommendations
Motorists currently perceive vehicle insurance as a fixed vehicle cost with respect to
annual vehicle travel. Marginal vehicle mileage reductions generally provide no
insurance premium savings. Extensive research indicates that crash and insurance claim
costs per vehicle-year increase with annual vehicle mileage. Other risk factors also affect
crash rates so it would be inappropriate to charge all motorists the same per-mile fee, but
premiums become more actuarially accurate if mileage is incorporated with other rating
factors, so lower risk motorists pays less per mile than higher risk motorists. As a result,
PAYD insurance, which bases premiums directly on the amount a vehicle is driven
during a policy term, increases economic efficiency and equity.
PAYD pricing not a new fee, simply a different way to pay existing fees. It rewards
motorists when they reduce mileage with the crash cost saving that result. This provides
many benefits including consumer savings and affordability, increased safety, congestion
reductions, road and parking cost savings, energy conservation, pollution reductions, and
reduced uninsured driving. Even motorists who continue with current insurance pricing
would benefit from reduced exposure to traffic risk, congestion and pollution emissions.
Basic PAYD is relatively simple to implement; it only requires verified odometer
readings (called “odometer audits”) at the beginning and end of the policy term. More
complicated data collection systems may be offered as a consumer option, but they
increase implementation costs and raise privacy concerns.
Many objections to PAYD are technically inaccurate or can be addressed with
appropriate policies. Most types of PAYD impose neither large transaction costs nor loss
of privacy. Mileage data can be collected through annual odometer audits performed by
service stations and insurance brokers. With most modern vehicles, odometer fraud is
difficult and can be detected with simple precautions. Rural residents as a group would
not bear higher premiums; only those who drive more than average among rural residents
would pay more with PAYD pricing.
PAYD pricing benefits vary significantly depending on product design. To minimize
confusion and maximize benefits it will be important to define performance ratings so
insures, regulators and consumers identify and select the most effective PAYD products.
The proposed rating system considers the following factors: mileage band size; minimum
number of miles motorists must purchase; percentage reduction in total premiums
provided by a 50% reduction in annual mileage; and if unit prices vary between mileage
bands, maximum difference between highest and lowest prices in a policy. This is a
preliminary proposal. Please contact Todd Litman (litman@vtpi.org) at the Victoria
Transport Policy Institute if you have questions or comments about this concept.
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