Issued by: Ministry of Transport
10 July 1997
WHITE PAPER ON THE ROAD ACCIDENT FUND SECOND DRAFT
REPORT TO THE MINISTER OF TRANSPORT BY JOEL JOFFE
1. BACKGROUND
1.1 The financial problems relating to the Road Accident Fund (the Fund) (previously the Multilateral Motor Vehicle Accidents Fund), date back to 1964 when the insurance industry, which was then providing protection through third party insurance, was refused permission by Government to increase premiums by 20% and Government assumed responsibility for compensating victims of road accidents. Despite frequent commissions of inquiry and many amendments to the governing acts, the financial position of the Fund continued to deteriorate but Government has, until recently, failed to take action to maintain the solvency of the Fund which has actually been insolvent for many years.
1.2 In May 1996 the Minister of Transport published a First Draft White Paper seeking to suggest effective and lasting solutions to the problems facing the compensation system, including measures to facilitate and simplify the system and to maximise the proportion of the available resources which reaches the victims by way of compensation.
1.3 After wide ranging consultation and in the light of criticism of the no-fault system from many of the constituencies consulted, a Second Draft White Paper (the White Paper) was published on 16 April 1997. The White Paper, which is a hybrid of a fault and no-fault system, sought to align the income and expenditure of the Fund by Increasing the Fuel Levy at least in line with inflation and reducing expenditure through limiting claims by a range of caps and the abolition of General Damages - linked with a reduction in settlement costs through simplifying the claims procedure and introducing, prior to litigation, independent Tribunals which would determine compensations on an inquisitorial basis.
2. APPOINTMENT OF SPECIAL ADVISOR
2.1 On the recommendation of the Board of the Fund I was appointed as an independent Special Advisor to the Minister to consider the viability of the proposals contained in the White Paper and the process and time table for the implementation of these proposals.
3. SUMMARY OF BROAD APPROACH OF THIS REPORT
3.1 After analysing the key facts leading to the insolvency of the Fund this report will recommend that the broad approach to be followed should build upon the proposals contained in the White Paper but modify those proposals in order to ensure that the rapidly accumulating deficit of the Fund is stemmed at the earliest opportunity. This will preclude, the introduction at this stage, of even a limited no-fault system as such a system would take in the order of a further two and a half years to design and implement. It will be proposed that in addition to Government raising the Fuel Levy, the range of caps - but not the actual amounts - proposed in the White Paper should be introduced; furthermore that the proposal to abolish General Damages set out in the White Paper should be introduced; furthermore that the proposal to abolish General Damages set out in the White Paper should be modified so that the victims of road accidents whose quality of life had been severely curtailed will be entitled to appropriate General Damages but again subject to a treshold and cap. It will also be recommended that the overall approach should be to develop a viable long term system which should be looked at independently of the deficit existing at the time of implementation of the revised system, which deficit should be ringfenced and guaranteed by Government.
4. KEY FACTS
4.1 Deficit - The deficit in the Fund is currently in the order of R8 billion. At the present rate of income, expenditure and claims, the existing system will add in the order of R2 billion to the deficit each year. Put another way every month that passes without changing the system adds approximately R160 million to the deficit. It accordingly is a matter of great urgency to stem the loss by amending the system at the earliest possible date.
4.2 Cash Flow - Existing reserves in the order of R1 billion will be exhausted in about three years at which stage the Fund will be unable to meet claims in full.
4.3 Reason for Deficit - The underlying reason for the deficit is that a totally inadequate premium is being paid by road users through the Fuel Levy for the insurance cover that the Fund provides - about R200 per year per vehicle instead of about R500 per year i.e. the premium currently paid is about 40% of what it should be.
The deficit has been aggravated by:
- the failure in the past to increase the levy to take account of inflation - the appalling accident rate - the heavy settlement costs.
5. A NO-FAULT SYSTEM
5. From a social point of view a no-fault system is highly desirable if it can be afforded.
5.2 At the present time on the information available it is impossible to determine with confidence the viability of such a system. However it becomes unaffordable at this stage for another reason. In order to implement such a system it would be necessary to design new computer systems, recruit new staff, train them and ensure that appropriate mechanisms were set up to enable road victims to submit and pursue their claims. It is unlikely that this could be achieved before april 2000 by which time the deficit would have increased by a further R4 billion to somewhere in the order of R14 billion.
5.3 This is clearly unacceptable. So regrettably the no-fault part of the system outlined in the White Paper cannot be proceeded with at this stage.
6. OBJECTIVES AND APPROACH UNDERLYING THE RECOMMENDATION WHICH FOLLOW
6.1 the objectives - There are two main objectives:
- to achieve an affordable and stable system which will offer a reasonable set of benefits in the long term
- to eliminate the existing deficit in the Fund
6.2 The priorities at the present time must clearly be to achieve the first objective of a viable long term system so as to ensure that the deficit does not increase.
6.3 Accordingly the recommendations will first outline the framework for a long term viable system and then touch upon the existing deficit.
7. PROPOSED FRAMEWORK FOR A VIABLE AND STABLE LONG TERM SYSTEM
INCREASE INCOME - RECOMMENDATION
7.1 Government should significantly increase the level of the Fuel Levy by not later than April 1998 and thereafter annually at least in line with inflation. It is essential for Government to appreciate that the current levy of 10.5 cents per litre on petrol and 6.8 cents per litre on diesel will only produce sufficient income for less than half the benefits currently provided. Accordingly unless there is a really significant increase in that levy the current aggregate benefits for victims will be at least halved.
DECREASE EXPENDITURE - RECOMMENDATIONS
7.2 Caps should be introduced on all benefits and appropriate thresholds should be set. The underlying approach to such caps and thresholds would be that:
- the public is paying a low premium and therefore it can only expect low benefits.
- if the members of the public wish to top up their benefits they can do so through the private sector (this is not discriminatory against the more affluent because it is they who in the normal course of events would be submitting the larger claims).
- the available resources should be channelled primarily to the more seriously injured and the poorer sections of the community.
- the caps would be set at a level designed to maintain a viable long term system. (It would be necessary to test a range of caps to see which produced the most savings, but which accorded with the approach set out above).
7.3 General Damages should be limited to compensation for victims whose quality of life had been severely curtailed but subject in any event to a specific cap and to the maximum cap on all claims.
7.4 The claims system should be simplified to minimise costs and the prescription period should be reduced.
7.5 An independent Tribunal operating on an inquisitorial basis should be introduced before permitting access to the Courts.
7.6 The level of settlement costs should be significantly reduced through a process of working with the professions to identify the most effective means of achieving this.
7.7 The passenger limit of R25 000 should be removed.
7.8 The common law should be amended to preclude victims entitled to claim under the Road Accident Fund Act from claiming damages in excess of the amount paid by the Fund.
7.9 In the interests of victims, the Fund and the professionals representing the victims should co-operate in a constructive and friendly manner to ensure that fair compensation is paid to victims with as little delay and expense as possible.
7.10 The proposals in the White Paper which are not inconsistent with the above, should be implemented.
7.11 The amended system should be implemented by not later than 1 May 1998.
8. THE RECOMMENDED APPROACH TO THE DEFICIT
8.1 The deficit at the end of April 1998 could be in the order of R10 billion.
8.2 Unless the Government increases the Fuel Levy very significantly or accident rates fall dramatically or all benefits are reduced to dersee how this deficit can be cleared in the medium term.
8.3 It is recommended that Government should ringfence and then guarantee this deficit and be willing to inject the funds necessary to pay the claims that arise from accidents taking place before April 1998.
9. A POSSIBLE NO-FAULT SYSTEM FOR THE FUTURE
9.1 Because a no-fault system is socially desirable, a longer term objective should be to investigate the viability of such a system. To that end it is recommended that the matter be further researched.
9.2 A major benefit of a no-fault system would be to eliminate most of the settlement costs which at present absorb in the order of 20% of the Fund. In addition to this there are significant attorney and client costs which reduce the benefits of the awards made to road traffic victims. the elimination of these costs would make a significant contribution to the viability of a no-fault system. On the other hand to the extent that these costs are significantly reduced in the immediate future, the pressure for introducing a no-fault system for this reason would likewise be reduced.
10. ROAD TRAFFIC ACCIDENT RATE
10.1 The most effective means of maintaining the viability of the Fund and of increasing benefits to victims would be to reduce significantly road accidents through draconian action.