EDITORIAL: Promising moves but RAF is not out of woods
Cutting down legal fees and bolstering accounting processes have put the Road Accident Fund in a better place
By any measure, four decades is a long time for any organisation to be running on fumes. Somehow, the Road Accident Fund, a state-owned insurance scheme that provides compensation to victims of car crashes, has managed to do just that.
The fund, which is housed in Fikile Mbalula’s transport department, reported a surplus on its claim liabilities for the first time since 1981 in the financial year to the end of March compared with the previous year.
That R3.2bn surplus is a good thing. It tells us the new leadership team led by Collins Letsoalo as CEO is not doing a bad job in taking out costs that partly contributed to the dismal finances of the organisation, which consistently offers a painful reminder of SA’s fiscal constraints.
The RAF has been on a downward spiral since 1981 when it suffered its first shortfall. The mismatch between what it should pay out and its income has been steadily rising since then, reaching R5.2bn in the 2019/2020 financial year before this year’s dramatic turnaround.
Part of the reason for the surplus is reassuring. When he was brought in almost a year ago, Letsoalo mapped out a sound plan centred on cutting the fund’s administrative costs, especially legal fees that he says have created business empires, which have predictably pushed back against his measures.
The scheme collects about R43bn a year in fuel levies as revenue, but about a quarter of the money, about R11bn, flows to attorneys, making legal fees the second-biggest cost after compensation to accident victims, while medical costs eat up another R2bn.
That is because most lawyers and doctors, hired to assess the severity of the injuries for the RAF to determine the size of a payout, charge the fund up to five times what the broader market pays for their services, according to scheme.
Even then, some lawyers would claim up to 25% of what the RAF agreed to pay out to crash victims as “success fees”, officials at the department of transport and the fund say, meaning less than half of what the fund pays out ends up in the hands of the victims.
If anything would bring into question the raison d’être of the RAF, it would be this depressing state of affairs.
So, when Mbulula told reporters on Monday that the RAF had cut its administrative costs by R7bn, more than half of which came from slashing legal costs, it was a long overdue and welcome piece of news.
It speaks to a sensible new approach that rests on the idea that claims can easily be settled out of court and early. For this reason, the RAF has disbanded a panel of more than 100 lawyers brought in during 2014 to help the fund challenge claims in court even when cases were unwinnable.
A study by Pretoria University professor Hennie Klopper shows that the RAF had ample room to cut legal costs, which ballooned from about R900m in 2005 when about 186,000 claims were lodged, to R11bn in 2020 when it finalised about 258,000 claims.
But it would be naive to think the RAF is out of the woods. The dramatic drop in claims liabilities, down from R330bn to R28bn, is due to a technical accounting treatment on how much it sets aside for potential claims as a social fund, as opposed to insurance companies, which have a regulatory duty to have extra money in reserve.
Furthermore, tens of thousands of claims were taken off the system and sent back to claimants as they had not met the legal definition of a claim due to insufficient documentation. Some of those claims will be back in the system the next time the RAF reports its annual results, and push up its overall claims liability.
While it is encouraging that the plan to cut costs and prioritise victims of road accidents is gaining pace, the RAF remains in a fragile financial position.
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