An Actuary’s First Hand Attempt at Buying Third Party Motor Insurance Coverage
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 email@example.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.