Malaysian Mo­tor Insurance Mar­ket

Are In­sur­ers Ready For Dereg­u­la­tion?

Insurance - - FEATURE - by Caro­line Dar­ling­ton

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.

In­tro­duc­tion

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.

Shift­ing Gears

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.

Con­clu­sion

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 caro­line.dar­ling­ton@gmail.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.

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