Malaysian Motor Insurance Market
Are Insurers Ready For Deregulation?
In a nation of 29 million people with rapid economic growth, Malaysia has one of the largest passenger car markets in Southeast Asia, with a ratio of 200 cars for every 1,000 persons; this translates to an estimated 5.5 million cars on the road.
Every year, more than half a million new vehicles are registered with the Road Transport Department (JPJ). The following table sourced from the Malaysian Automotive Association (MAA) is a summary of new passenger and commercial vehicles registered in Malaysia from year 2008 to 2012. The graph shows a steady and consistent growth over the last five years reaching 627,753 units in the year 2012.
Auto Industry Drives General Business Premium Growth
The general insurance industry registered positive premium growth of 8.2 per cent in gross premiums to reach RM15.180 billion in 2012 compared to the increase of 7.85 per cent (RM14.029 billion) in 2011. Motor and Fire insurance achieved an increase in gross written premium of 9.3 per cent to reach RM6.978 billion (2011: RM6.382 billion, 6.93 per cent). According to the General Insurance Association of Malaysia (PIAM), motor insurance had the largest market share of 46.6 per cent in 2012 (2011: 46.4 per cent), followed by Fire at 16.4 per cent (2011:16.5 per cent).
Antiquated Premium System
Despite having the largest market share with the highest rate of premium growth, the motor insurance sector was set back by more than 30 years because of an obsolescent premium rating system prescribed by the Malaysian Motor Insurance Tariff introduced in 1978; mandatory for licensed insurers writing motor insurance in Malaysia.
The general insurance industry was faced with a dilemma in a rapidly changing and uncertain business environment – they had to decide when to pull the brakes and when to accelerate or how to shift gears to sustain profitable premium growth in the face of deteriorating motor insurance results caused by inflation, escalating court awards and increasing number of motor vehicle theft which increased from 8,869 cases in 1997 to 40,284 in 2009. Without being able to raise motor premium rates, with the average motor claim spiralling up and average motor premium declining due to the high ‘noclaim-discount’ of up to 55 per cent (for five claim free years) insurers were forced to reject ‘unfavourable’ motor risks such as third party and older vehicles (more than ten years old). The displacement of motor insurance created undue hardship to the general public who needed mandatory motor insurance for renewal of licensing of their vehicles. In January 2012 the regulator, Bank Negara Malaysia for the first time in 34 years since the tariff came into force introduced a premium increase which began the process of gradual rate increases annually over the next four years to pave way for motor de-tariffication in the year 2016. The long awaited premium hike at first seemed “too little, too late” as the increase was too small or insignificant to turnaround the deteriorating motor insurance results eroding general insurance profits. On a positive note, however the regulator’s move was seen as baby steps on a somewhat uncertain path to deregulation of the motor insurance sector.
Finding A Balance
The proponents of the tariff system felt that allowing free market forces to dictate prices could cause a price war and lead to high premium rate volatility which eventually could lower profits and erode solvency margins. They argue that the current use of tariffs for motor and fire insurance have been effective in controlling unhealthy undercutting and have kept overall prices for general insurance products relatively higher in Malaysia than in most other deregulated markets.
There is a delicate balance to be achieved between the unregulated free market and the amount of regulations needed to protect consumers and ensure financial stability. Deregulation, will generally open up to competition and allow consumers to benefit from lower prices and new services which are usually more efficient and consumer-friendly and make the economy more competitive.
The Underwriting Cycle
In a de-tariffed market, when industry profitability rises to a level such that some competitors are willing to take a lower profit to gain market share, they begin cutting prices. To retain market share, competitor companies cut their prices until market prices spiral down to where companies begin losing money. However, this does not result in a price war because when losses exceed a company’s comfort level, it begins raising prices to recover profitability, allowing competitor companies to also begin raising prices, and a reverse spiral occurs until once again industry profits reach a point where some competitors become willing to accept lower margins to gain market share, lower their prices and the cycle restarts.
The underwriting cycle may eventually disappear because the cycle is a marketlevel concept, not a company-level concept. A well-run motor insurer, for example would monitor actual-toexpected claims on a number of rating variables on a monthly basis and quickly make changes if unfavourable trends begin to emerge. Furthermore by using data warehouses, insurers will be able to drill into a much finer level of detail to identify problems as they first develop rather than waiting until they are evident and worse. In addition, technology can make administrative systems more expeditious and versatile to implement rate increases within a couple of months of decision and approval, or within a stipulated period of the first emergence of a negative trend. In this regard, large insurers will have more flexibility in setting their own premium rates for motor insurance based on their historical loss experience. As such, they will be able to offer more competitive rates compared to other insurers without having to significantly sacrifice profitability.
Constructing A RiskBased Premium Model
In the past, a major barrier to motor premium rate review was the absence of credible data on motor risks and claims profiles. To that effect, Insurance Services Malaysia (ISM) has been laboriously collecting data from the industry and processing it through a Data Verification Tool to ensure data integrity and accuracy. Equipped with the data bank, ISM in collaboration with JPWALL (an actuarial consulting partner) are set to begin the process of developing a motor rating model to provide a benchmark for a motor premium pricing strategy for the insurance industry. Will the new rating model better reflect the true cost of claims? By taking into account risk profiles of motor claims, premium rates would ultimately be “fairer” to the average consumer. The risk-based pricing strategy would also help reduce the rate of accidents on the road as vehicle owners will become more careful drivers to avoid a premium rate increase. This would replace the current uniform and level premium system, which applies across the board to all insurance providers for a standard product and scope of coverage.
In a de-tariffed market, when industry
profitability rises to a level such that some competitors are willing to take a lower profit to gain market share,
they begin cutting prices.
So far, small but positive steps have been taken towards deregulation with rising anticipation among stakeholders as uncertainties abound in the financial and economic landscape.
It is no easy task to derive technical premium rates for motor insurance because risk factors can be numerous, based on characteristics of the insured (e.g. age or gender), the vehicle (e.g. sum insured or make/model) and their aspects (e.g. usage of vehicle). These factors may be integrated into the pricing of motor insurance premiums using generalised linear modelling (GLM), a method widely accepted internationally though not yet commonly used among actuaries or insurers in Asia. In order to construct such a motor premium rating model, the frequency and severity of claim types must be reviewed; for example, own damage, third party property damage, third party bodily injury or death claims are modelled and subsequently combined to calculate the expected cost of each claim type followed by the expected claims costs of each policy type i.e. comprehensive or third party coverage after factoring in costs, expenses and expected profitability including provisions for incurred but not reported (IBNR) claims and large claims caused by natural calamities such as floods.
Are Insurers Ready For Motor DeTariffication?
In the recent past, insurers have increasingly become more selective in accepting motor risks, whilst some completely stopped writing third party only policy because of its low premium, long tailed liability and unlimited coverage for bodily injury and death. With the implementation of the risk based capital framework in 2009, insurers were also not prepared to invest more capital where the stakes were high and the returns low – the goal of every business enterprise after all, is to maximise shareholder value. Malaysian insurance companies entered into a new era of underwriting and claims management, having to balance risk profiles against capital adequacy requirements and there was a dire need to increase claims efficiency to improve motor loss ratios. With the setting up of a joint working committee comprising representatives from the government, insurance industry, consumer and transport groups and the Bar Council in April 2011, the efficiency of motor claims settlement was enhanced especially with personal injury claims settled via court mediation and pre-trial case management which ultimately brought claims costs down and deterred fraudsters who cost the insurance industry millions of dollars each year. So far, small but positive steps have been taken towards deregulation with rising anticipation among stakeholders as uncertainties abound in the financial and economic landscape. The hope that deregulation will promote competition to induce efficiency, innovation, entrepreneurship and competitive prices to improve the quality of products and services are not far-fetched; however, the need to provide wider choices in terms of the level of coverage and prices to the consumer remain a major challenge.
As Malaysia forges ahead in the 21st century, the ability to offer world class financial services, in terms of breadth, depth and quality requires a robust regulatory mechanism that has the trust of the public put in place. With the coming into force of the Financial Services Act 2013, greater emphasis will be placed for financial consumer protection and market discipline with incentives for sound risk management in the coming years. Will the removal of the Malaysian motor tariff allow market forces to set equitable premiums or will it lead to price volatility? The answer lies in the level of preparedness of insurers in facing deregulation by being better equipped with the skills and expertise of rating complex products including motor insurance and being better capitalised to strengthen business resilience. Whatever the course charted, the primal concern is that the road ahead is going to be a bumpy one, with major hurdles to overcome before safety belts can be un-latched to arrive at the destination safely.
Caroline Darlington, ACII (Chartered Insurer) has more than 30 years working experience in the insurance industry, having headed various departments such as Underwriting & Reinsurance, HR Training & Development and Financial Management of a large composite insurance company. She is currently a Lecturer with the Malaysian Insurance Institute and can be contacted at email@example.com.
The answer lies in the level of preparedness of insurers in facing deregulation by being better equipped with the skills and expertise of rating complex products including motor insurance and being better capitalised to strengthen business resilience.