Insurance sector needs more work

According to BNM governor, the existing business models are ‘essentially broken’


The national insurance industry has a long way to go towards achieving the 75% penetration rate by 2020, despite major reforms undertaken by the central bank to strengthen market participation and encourage the development of the sector.

Bank Negara Malaysia (BNM) governor Tan Sri Muhammad Ibrahim said the insurance and takaful industry has grown at an annual rate of 10.47% in the 20 years prior to 2016.

The sector — which now comprises 6% of the national financial system assets — has excess capital above the regulatory requirements of RM37.9 billion.

Insurance penetration rose to 56% in 2016 from 25.3% in 1996, while foreign insurers’ market share grew to 76% in 2016 from 60% in 2009.

“Unfortunately, this is where the good news ends,” Muhammad said in his keynote address at the Malaysian Insurance Summit 2017 in Kuala Lumpur yesterday.

He said from the perspective of the population that remains underserved, the existing business models are “essentially broken”.

Although life insurance premiums and family takaful contributions have grown 48% since 2010, the penetration rate has only increased by 5%.

“This indicates that the industry is increasingly concentrated on a narrow insurance segment. If we eliminate double-counting, only 35% of adults have some form of cover. For the rest, products are too complex and remain unaffordable.

“Existing distribution channels also fail to provide adequate access, especially outside urban centres. Technological advancements are not being used to the fullest,” he said.

As for the population pockets that are being served, making a purchase or claim is a difficult process, while increasing medical insurance premiums have raised the issue of products that offer little protection against escalating costs of healthcare, alongside insurers’ contracting arrangements with healthcare service providers.

“While insurers might not be the guilty party here, the response to the criticism has been slow and wanting. The insurance community is meek in safeguarding the sector’s image and reputation,” Muhammad said.

He further said that many foreign insurers rely significantly on group level support. Between 2014 and 2016, insurers in Malaysia are estimated to have paid no less than RM1.3 billion to foreign affiliates in management fees and outsourcing arrangements.

“Such arrangements are extractive and will have longer term implications for the development of a strong domestic industry. We need higher reinvestment by insurers to support the protection and risk management needs of our country,” he added.

Making Insurance Affordable to All

The governor said products and delivery channels need to be diversified and redesigned to better suit citizens, entailing a renewed focus on protection needs — particularly for first-time buyers.

To that end, BNM is partnering with the industry to introduce “Perlindungan Tenang”, a national branding and communication platform, in the near future.

“Perlindungan Tenang is intended to reach eight million working-age Malaysians and over 700,000 micro enterprises that currently need insurance and takaful protection against key risks,” Muhammad said.

He said the products will be affordable, accessible and easy to understand. They will carry the Perlindungan Tenang logo, and benefit from regulatory flexibilities and co-branding and promotional initiatives.

“The aim is to address ‘pain points’ that commonly hold consumers back from purchasing insurance and takaful products. To date, four insurers and two takaful operators have developed products that will be introduced under this initiative and we expect many more to come on board,” he said.

Life Insurance Association of Malaysia (LIAM) president Toi See Jong said there will be a “starter pack” launched by the end of this month to increase insurance penetration rates among underserved segments of the population.

“This is an initiative by LIAM and the Malaysian Takaful Association (MTA), driven by BNM, to cater to the B40 group (bottom 40% of house- holds) as well as other segments. We hope that this starter pack will help address the issue of affordability and sustainability of insurance policies,” he said.

MTA chairman Muhammad Fikri Mohamad Rawi said conventional insurance and takaful operators have had no problem in penetrating the middle-class and affluent segments of the market, but penetration rates remain low among the mass market.

Thus, he said, there is the need for an affordable package with basic coverage.

As at end-2016, Muhammad Fikri said the conventional insurance penetration rate stood at about 40%, while takaful was at 14% — giving a combined penetration rate of about 54%.

Meanwhile, the industry needs to embrace digitalisation by capitalising on the mobile penetration rate of 134% and the proliferation of new technologies.

In 2016, Internet banking subscribers numbered 22.8 million, or over

70%, of the total population. In contrast, online insurance distribution today still accounts for less than 0.1% of business volume, which Muhammad called “a very poor achievement”.

Tackling Fraud through Teamwork

Muhammad also launched the Fraud Intelligence System (FIS) at the summit yesterday, labelling it a milestone in the industry’s efforts to combat fraud particularly in the motor business.

A pilot run of the RM10 million system, which will aid insurers and takaful operators in claims fraud detection, went live in September 2017 with four insurers. The system is expected to be fully rolled out in August next year.

“We expect all insurers to support these arrangements. Insurers who refuse to participate in this scheme will be looked upon unfavourably. We shall also take note of these recalcitrants’ failure to participate for a common good,” Muhammad declared.

He said, in the immediate term, the industry needs to create a convenient and seamless first-loss-notification process that leverages on shared infrastructure, thus eliminating processes that add costs and enable abuse and fraud to take place.

“Certain infrastructure should not be considered a competitive edge. We have raised many times the issue of sharing infrastructure and information among industry players, but efforts towards this have been quite disappointing,” Muhammad said, adding that the FIS is a significant first step in this direction.