Insurance industry at the crossroads with motor insurance liberalisation

Importance of this sector cannot be denied, especially its contribution to the country’s gross national income. A strong and resilient insurance sector is critical to the nation

by P PREM KUMAR

Malaysia’s automotive and transportation sector has been enjoying brisk sales for years.

Last year, the industry sold 580,124 vehicles. In 2015, the figures reached an all-time high of 614,664 vehicles with 563,883 new passenger cars hitting Malaysian roads.

Continued growth of vehicle sales and the booming economy had boosted car ownership in the country. Worldwide, against the population, Malaysia is among the highest in terms of car ownership.

According to official statistics, the number of registered vehicles in the country rose from 8.55 million in 1997 to 27.61 million at the end of 2016.

Today, the registered vehicles on the Malaysian roads are estimated to be nearing three times the number of vehicles 20 years ago.

Such phenomenal growth seems to be a blessing to related industries like services, lenders and insurers. Demand has been rising for all these sectors.

But worries have heightened in recent years amid the greater number of accidents and insurance claims. In 2016, 7,152 people died in road accidents in the country compared to 6,706 deaths a year before.

Stunningly, a total of 521,466 accidents were recorded in 2016, a jump compared to the 489,606 accidents recorded in 2015.

That amounts to 1,428 accidents every day, or 59 accidents every hour. Road accidents last year cost the country an estimated RM9.21 billion in losses based on the Malaysian Institute of Road Safety Research figures.

A Challenging Outlook for Insurers

The rise in accidents and insurance claims have become a real industry concern.

Second Finance Minister Datuk Seri Johari Abdul Ghani recently told the Dewan Rakyat that before the motor insurance liberalisation on July 1, insurance companies were paying RM1.02 in claims for every RM1 of premium.

According to industry figures, the insurance sector’s growth had moderated to 1.1% last year — or half of the 2.2% growth recorded in 2015.

Motor insurance, which accounts for 46.2% of total premium and the largest pie for the insurance sector, stood at RM8.17 billion last year. But the growth was a small 0.8% compared to 2015’s RM8.09 billion premiums.

But what is worrying for the General Insurance Association of Malaysia (PIAM) — the body that represents all insurers in the country — is the impact on motor insurance claims.

Motor insurance claims reached RM5.02 billion last year, or a staggering RM13.8 million a day. The figure was higher in 2015 with RM5.29 billion in claims.

These claims are for property damage for both own car and the other party’s vehicle, bodily injury and death, and vehicle theft. The high claims have left most insurers in deficit.

A Transformation for the Industry

Importance of the sector cannot be denied, especially its contribution to the country’s gross national income. A strong and resilient insurance sector is critical to the nation.

Last year, Bank Negara Malaysia (BNM) had introduced the phased liberalisation for motor and fire tariffs. It was one of the most significant efforts by the central bank in the last three decades.

PIAM chairman Antony Lee (picture) said the liberalisation of the tariffs was to pave the way for the pricing of motor and fire insurance protection — which is more reflective of risk profile groups of consumers.

“In this new environment, the insurance and takaful industry will have the flexibility to offer motor and fire products with new features at market-based pricing, which is based on the risk profile groups of the policyholders,” Lee, who is also AIG Malaysia Insurance Bhd CEO, said.

This is of a greater importance, as motor and fire insurance account for 64% of the industry’s total market share.

PIAM had said the premiums charged by insurance companies have been regulated by a tariff structure, and had resulted in a growing gap between premiums collected and claims paid out by motor insurers.

The second phase of motor insurance liberalisation came into force in July this year. The new calculations for motor insurance will see consumers with higher risk profile to pay higher premiums.

Premiums now take into account broader risk factors that will drive fairer pricing; greater innovation on new products tailored to consumer needs with improved services; and sustainable motor insurance protection for consumers over the long term at competitive prices.

Shifting to a New Paradigm

Detariffication will lead to a paradigm shift to Malaysia’s general insurance business. It remains a worry that such a move would lead to unhealthy competition, as seen in China and India.

Advisory and brokerage firm Willis Towers Watson generally views the Malaysian general insurance market as being relatively better placed, going into liberalisation.

Having a risk-based capital (RBC) framework in place ahead of liberalisation could — to a certain extent — reduce the intensity of price wars in Malaysia.

China had to re-introduce tariffs again in 2006 after three years of liberalisation to control the extent of losses suffered by the industry due to falling prices, increasing commissions and other expenses.

Malaysia is less likely to experience a similar situation.

The first phase of the liberalisation of the motor and fire tariffs was introduced on July 1, 2016. During this phase, insurers and takaful operators were given the flexibility to offer new motor products and add-on covers at market-based pricing.

Effective July 2017, premium pricing for motor comprehensive and motor third-party fire and theft products was liberalised, with premium pricing determined by individual insurers and takaful operators.

Other than the sum insured, engine cubic capacity of the vehicle, vehicle and driver’s age, premiums may be driven by other factors which include safety and security features in the vehicle, duration that the vehicle is on the road, geographical location of the vehicle (in areas with higher incidents of theft) and traffic offences on record.

Giving Choices and Protecting Customers’ Interest

The paradigm shift in the local insurance industry can largely be attributed to two important changes, free competition and consumer choices, each of which can have a wide-ranging impact on the rest of the business.

With liberalisation, insurers are free to design their products and also price them differently — a space where some insurers may seek to pursue a strategy which focuses on increasing their market share versus opting for profitable growth.

According to Lee, the liberalisation will create competition, which would encourage insurers to innovate and offer a wider range of motor and fire products to cater for different consumer needs and preferences.

He said this will also allow insurers to innovate and to improve operational efficiencies, as well as enhancing customers’ experience such as simpler and easier ways to purchase insurance or to make claims.

“In a nutshell, consumers will not only benefit from having greater product choices, higher service levels and improved accessibility of coverage, but to (also) benefit from varying coverage limits which are customised to match individual risk profiles,” he underlined.

According to Willis Towers Watson, such an approach by insurers could trigger price wars, at least for products that are currently profitable, although the prevailing RBC regime and the experience gained from other liberalised markets may act as a restraining factor.

In such a situation, it becomes even more critical for insurers to focus on improving the overall quality of their book of business (risk profile of customers).

Increased sophistication is envisaged, particularly in the manner in which insurers underwrite their products (risk selection) and how they price them.

With increased competition and pressure on premium rates, insurers moving forward are likely to introduce innovative variants of current products to differentiate their offerings.

Willis Towers Watson expects customers’ buying behaviour to change overtime — with the availability of choices and increased marketing efforts by insurers to promote their products.

With the choices in hand, customers will start to shop around and evaluate options before making their purchase decisions.

Challenges for the Industry

To operate efficiently in such an environment, insurers have to revisit their product, customer and distribution strategies.

The previous “one size fits all” approach will need to be replaced with an alternative approach where the marketing mix and strategies are aligned to the varying needs and requirements of individual customer segments.

Lee said discussions on liberalisation between the industry and BNM had taken place since 2013, resulting in ample discussion time.

“Various measures have been taken at individual company levels, with lead time provided to allow all insurers to build internal capabilities and formulate their marketing activities based on their business models,” he added.

Willis Towers Watson does not dismiss further consolidation to take place within the industry, especially to provide a greater strength following the liberalisation.

Key drivers which could force consolidation include the inability of an insurer to compete in a free market situation, due to the lack of internal capabilities and resources to help develop and sustain competitive advantage in the market.

Besides that, capital constraints need to be taken into consideration amid an insurer’s inability to support the investments required for building capabilities necessary to successfully compete in the market.

Consolidation will also maximise synergies — insurers with complementary capabilities may consider merging to further strengthen their capabilities and create a larger and stronger unified entity, which can successfully compete and grow in a competitive environment.

The immediate outcome following liberalisation remains unclear, but the long-term benefit is the assurance of a resilient motor insurance sector, with better protection for customers’ interests.