An Ac­tu­ary’s First Hand At­tempt at Buy­ing Third Party Mo­tor Insurance Cov­er­age

Insurance - - FEATURE - by Gary Hoo

It was that time of the year to re­new my car insurance pol­icy, but this time it would be a lit­tle dif­fer­ent. The Pro­ton Wira, which I had been keep­ing as a sec­ond car – it was now 17 years old – ac­tu­ally be­longed to my mother, who was the reg­is­tered owner. As is com­monly the case with par­ents and their chil­dren, I got to use the car when I left to study at a lo­cal univer­sity. How­ever, I had never got­ten around to chang­ing the own­er­ship of the car af­ter all th­ese years. The car had al­ways been re­newed un­der com­pre­hen­sive pri­vate car insurance, mainly be­cause of the 55 per cent No Claim Dis­count (NCD) that had stayed with the pol­icy for years, which also means I’m not a bad driver! How­ever, al­though not sur­pris­ingly, the sum in­sured in re­cent times had a min­i­mum re­quired amount and had stayed at RM8,000 for about four or five years now, even though the car’s ac­tual mar­ket value was prob­a­bly just about RM5,000. Com­pli­ca­tion arose in Septem­ber 2013 when I de­cided to give the car away to a close rel­a­tive and I wanted to help re­new the insurance pol­icy for an easy han­dover. As the car was now in its 17th year, I thought it would be a good idea to switch to third party cov­er­age in­stead, as there will not be any more NCD un­der the new own­er­ship. The ex­ist­ing in­surer told me that be­cause it would be un­der a new owner, it would be con­sid­ered a new pol­icy for which the com­pany is not al­lowed to of­fer third party cov­er­age. I then asked if the in­surer could do com­pre­hen­sive cov­er­age in­stead, to which I was also told that it was not pos­si­ble, as even with a min­i­mum sum in­sured of RM8,000, it was still be­low the min­i­mum tar­get pre­mium. And so, I was re­jected with­out re­ceiv­ing much of an al­ter­na­tive other than go­ing to the Malaysia Mo­tor Insurance Pool (MMIP).

Not want­ing to use my con­nec­tions (a CEO of a very large in­surer ca­su­ally men­tioned over lunch that if I had ap­proached him, he would have ap­proved the cov­er­age), and want­ing to ex­pe­ri­ence how it was like be­ing the av­er­age man-on-the-street, I went on a third party pri­vate car insurance cov­er­age hunt. I had also de­cided that I would not go to MMIP, not just be­cause of the ad­di­tional load­ings it would im­pose, but also be­cause I was so cer­tain I could some­how get it in­sured with an in­surer. As con­fi­dent as I was, I found out that it was im­pos­si­ble to get the Pro­ton Wira in­sured un­der a third party pol­icy – I must have asked four to five other in­sur­ers. They could only of­fer com­pre­hen­sive cov­er­age and even then, they gen­er­ally said that be­cause the car was in its 17th year, they could not do it (un­less I per­haps took up a “vol­un­tary” driver’s PA pol­icy, ac­cord­ing to an agent I spoke to), apart from one com­pany. And so, I ended up with a com­pre­hen­sive taka­ful mo­tor pol­icy, at a min­i­mum sum in­sured of RM10,000 (25 per cent higher than what it was in­sured for the pre­vi­ous year, and at dou­ble the car’s ac­tual mar­ket value!) with the pre­mium be­ing ap­prox­i­mately RM500 – prob­a­bly just meet­ing their min­i­mum tar­get pre­mium re­quire­ment as well.

Al­ter­na­tives & Anal­y­ses

Be­ing an ac­tu­ary, I can ap­pre­ci­ate why in­sur­ers have to act the way they do, es­pe­cially with their hands tied when it comes to the pre­mium rates. A lot has been said about the ex­ist­ing mo­tor tar­iff and how it is time to call an end to it. I fully sup­port this move, as it will mean mov­ing into a more ac­cu­rate risk-based pric­ing struc­ture. But how about right now; can’t in­sur­ers do some­thing be­fore 2016, the ex­pected year of the de-tar­iff? And what could have been done in my sit­u­a­tion? The strict un­der­writ­ing rules by in­sur­ers to re­ject all old ve­hi­cles be­yond a cer­tain age is un­der­stand­ably a con­ve­nient way to elim­i­nate the risk of un­der­pric­ing, as typ­i­cally old cars have low val­ues, hence low premi­ums. How­ever, it is in­ter­est­ing that this ar­gu­ment is based on the min­i­mum pre­mium tar­get the­ory – that there is an amount to achieve to make a risk ac­cept­able. If this amount re­lates to the cost as­so­ci­ated to pos­si­ble third party bod­ily in­juries where the tar­iff rates are in­suf­fi­cient – loss ra­tios are cur­rently around 250-300 per cent – then I fully un­der­stand, es­pe­cially for third party insurance poli­cies. It is highly un­likely that third party pol­icy premi­ums are suf­fi­cient to cover ex­pected claim costs.

I had also de­cided that I would not go to MMIP, not just be­cause of the ad­di­tional load­ings it would im­pose, but also be­cause I was so cer­tain I could some­how get it in­sured with an in­surer. The strict un­der­writ­ing rules by in­sur­ers to re­ject all old ve­hi­cles be­yond a cer­tain age is un­der­stand­ably a con­ve­nient way to elim­i­nate the risk of un­der­pric­ing, as typ­i­cally old cars have low val­ues, hence low premi­ums.

How­ever, if in­sur­ers are look­ing for a min­i­mum pre­mium of RM500 per com­pre­hen­sive pol­icy, their anal­y­sis may be flawed – i.e. is the cost of Own Dam­age (OD) claims, which rises with the value of the car, ac­cu­rately in­cor­po­rated for each risk they un­der­write? An ex­pen­sive car at a high sum in­sured would surely in­cur larger OD claims, re­quir­ing the min­i­mum pre­mium to be much higher than that of an old car at a much smaller sum in­sured. An ac­tu­ary would be able to pro­vide an insight to the in­surer as to whether the min­i­mum pre­mium should ac­tu­ally be just RM300 for such re­ally old cars such as my Pro­ton Wira and grad­u­ally in­crease it to above RM1,000 and be­yond the newer the cars are, in­stead of a blan­ket min­i­mum pre­mium of RM500, for ex­am­ple.

Another as­pect to con­sider is to of­fer third party fire and theft cov­er­age in place of ba­sic third party insurance poli­cies. Re­cent in­dus­try sta­tis­tics in­di­cate that cer­tain in­sur­ers have moved strongly into this area. In my search for an insurance pol­icy for my Pro­ton Wira, not once was I of­fered this cov­er­age. If cer­tain large in­sur­ers are writ­ing it, much more than they are writ­ing third party poli­cies, then it may war­rant a sec­ond look by in­sur­ers that have not con­sid­ered this op­tion. Are th­ese in­sur­ers tak­ing on high risk for high re­turns or do they know some­thing that other in­sur­ers do not? Could this be an al­ter­na­tive to con­sumers like me who were look­ing for a sim­ple third party cov­er­age but ended up with an ex­pen­sive com­pre­hen­sive pol­icy?

Pre­par­ing for the Rio Olympics

Even as 2016 draws closer by the day, I be­gin to no­tice more ac­tiv­ity in the pric­ing scene for gen­eral in­sur­ers. More com­pa­nies are hir­ing ac­tu­ar­ial re­sources, some to set up pric­ing ca­pa­bil­i­ties, some to fur­ther strengthen the teams they al­ready have. I be­lieve this is the next wave of growth and de­mand for ac­tu­ar­ies in Malaysia – the pre­vi­ous one be­ing in re­serv­ing/val­u­a­tion and cap­i­tal when RBC was in­tro­duced. Com­pa­nies that start early will go a long way in gain­ing a sig­nif­i­cant ad­van­tage in time for the de­tar­iff of pre­mium rates. And even now, with the ben­e­fit of such an­a­lyt­ics, th­ese in­sur­ers can take ad­van­tage of their deep mo­tor claims knowl­edge to un­der­write based on risk un­der the cur­rent tar­iff struc­ture. They can iden­tify risks that have ac­cept­able pre­mium rates and those that do not when com­pared to the

And even now, with the ben­e­fit of such an­a­lyt­ics, th­ese in­sur­ers can take ad­van­tage of their deep mo­tor claims knowl­edge to un­der­write based on risk un­der the cur­rent tar­iff struc­ture.

cur­rent tar­iff, and do it more ac­cu­rately than crude meth­ods one nor­mally sees from sim­ple sum­maries of claims ex­pe­ri­ence such as one-way ta­bles. The so­phis­ti­cated in­surer will need to con­sider in­ter­na­tion­ally recog­nised tools, such as Gen­er­alised Lin­ear Mod­el­ling, to de­ter­mine ac­cu­rate claim costs to ar­rive at suf­fi­cient premi­ums. Fail­ing to do so in time for 2016 will mean that they will be a fol­lower rather than a leader in se­lect­ing and pric­ing risks. It has been widely pub­lished that other mar­kets that de-tar­iffed im­me­di­ately ex­pe­ri­enced a dras­tic fall in pre­mium rates as in­sur­ers no doubt wanted to re­tain or even in­crease their mar­ket share, some hav­ing to take pre­mium cuts to en­sure this. It is not sur­pris­ing why this had to be done: with­out enough top-line rev­enue, reper­cus­sions could in­clude los­ing mar­ket share and hurt­ing an in­surer’s rep­u­ta­tion as a mar­ket leader, pos­si­bly af­fect­ing cash flow and claims- and ex­pense-pay­ing abil­ity (such as staff salaries), in­cur­ring the con­cern of share­hold­ers and if listed on the stock mar­ket, send­ing the com­pany’s share prices plum­met­ing if not prop­erly ad­dressed and man­aged. The next Olympics will be in Brazil, the same year as the ex­pected de-tar­iff of mo­tor pre­mium rates. Even now, ath­letes are al­ready train­ing, com­pet­ing and pre­par­ing them­selves for this once-in­ev­ery-four-years sports ex­trav­a­ganza. The fittest and strong­est will emerge vic­to­ri­ous, while coun­tries with tra­di­tion­ally proud records will likely con­tinue to dom­i­nate. But a few lesser known ath­letes and coun­tries may spring sur­prises and cap­ture the hearts of the spec­ta­tors and au­di­ences world­wide. The same mind­set should ap­ply in the case of gen­eral in­sur­ers in Malaysia pre­par­ing for the de-tar­iff, which is surely of more im­por­tance as it is not a once-in-ev­ery-four-years event that re­peats it­self like the Olympics, but prob­a­bly just once in a life­time. In­sur­ers that have strong in­ter­na­tional ties will be at an ad­van­tage with su­pe­rior an­a­lyt­ics – both tools and re­sources – avail­able to them, but this does not mean that there is no hope for the rest. As we move into 2014, it re­mains just two years for com­pa­nies to for­mu­late pric­ing strate­gies that are prop­erly thought through, ad­e­quately pre­pared for and ac­tu­ar­i­ally re­sourced to emerge as vic­tors in the fu­ture Malaysian mo­tor insurance land­scape. Will it be a big vic­tory lap with sup­port­ers and spec­ta­tors cheer­ing great suc­cess, or will be a quiet plane ride home with heads bowed low come 2016?

Gary Hoo is a Prin­ci­pal for JPWALL Con­sult­ing Part­ners Malaysia and has a deep in­ter­est in the ac­tu­ar­ial de­vel­op­ment of the gen­eral insurance in­dus­try in Malaysia. He is a Fel­low of the Ca­su­alty Ac­tu­ar­ial So­ci­ety and is a Fel­low mem­ber of the Ac­tu­ar­ial So­ci­ety of Malaysia as well as the Sin­ga­pore Ac­tu­ar­ial So­ci­ety. The au­thor can be con­tacted at gary­hoo@jpwall.com.

In­sur­ers that have strong in­ter­na­tional ties will be at an ad­van­tage with su­pe­rior an­a­lyt­ics – both tools and re­sources – avail­able to them, but this does not mean that there is no hope for the rest.

Newspapers in English

Newspapers from Malaysia

© PressReader. All rights reserved.