Own Damage, Third Party Property Damage Claims and Malaysian Motor Insurance: An Empirical Examination

Abstract

Risk is an indication of uncertainty about variability in the outcomes around some expected values. One can concludes that risk has its cost which depends on the level of uncertainty about the variability surrounding the expected values. Therefore, various types of risk exist in different sectors of human endeavors that deserve attentions. Thus, different risk management devices are formulated to minimize risk and its cost. Motor insurance policy is one of such policy usually purchased to reduce risk and financial losses associated with motor accident. This is usually aimed at mitigating loss reduction. Direct losses may arise from auto accident which may cause physical damage to the owner of the vehicle, the vehicle and the third party property. This paper examined the effects of own damage claims and third party property damage claims to the risk exposure of Malaysian insurers for three years from 2001 to 2003. Generalized Lease Square (GLS) was employed to examine these effects. It was found that own damage may not constitute a big treat to the total risk exposure of Malaysian insurer. While it increases their risk exposure by 2% which is not statistically significant; the third party property damage increased motor insurers’ risk by almost 15%. Based on the significant statistics, we found the Malaysian insurers’ risk exposure reduced with a higher premium the third party property damage in motor insurance policy.