Chal­lenges Ahead for De-tar­if­fi­ca­tion

Insurance - - CONTENTS - Com­piled De­Calais Sdn Bhd

WITH JUST TWO YEARS TO GO BE­FORE THE LONG-AWAITED DE­TAR­IF­FI­CA­TION OF MO­TOR IN­SUR­ANCE IN MALAYSIA, IT IS CER­TAINLY TIME FOR IN­DUS­TRY PLAY­ERS TO BE DE­VEL­OP­ING THE SYS­TEMS AND ED­U­CAT­ING BOTH THEIR STAFF AND THE PUB­LIC TO MAKE DE-TAR­IF­FI­CA­TION A RE­AL­ITY AS PLANNED IN 2016. THE TOPIC WAS CER­TAINLY A HOT BUT­TON AT THE THIRD MALAYSIA IN­SUR­ANCE SUM­MIT IN KUALA LUMPUR LATE LAST YEAR.

The ben­e­fits of de-tar­if­fi­ca­tion are well ap­pre­ci­ated by both in­sur­ers and con­sumers alike. On the in­sur­ers side, they will be able to dif­fer­en­ti­ate be­tween good and not so good mo­tor risks and charge ac­cord­ingly in­stead of hav­ing to stick to the ta­ble rate even for known bad risks. In other words, in­sur­ers will no longer have to do un­prof­itable busi­ness. On the con­sumer side, the good driv­ers will be able to re­ceive lower pre­mi­ums rather than be­ing lumped to­gether, for the pur­poses of cal­cu­lat­ing pre­mi­ums, with all the other driv­ers in Malaysia who hap­pen to own the same cat­e­gory of ve­hi­cle. The move will also en­cour­age com­pe­ti­tion be­tween in­sur­ers and this is usu­ally a good thing from the per­spec­tive of con­sumers.

WHAT IN­SUR­ERS NEED TO DO TO BEN­E­FIT FROM THE DE-TAR­IF­FI­CA­TION?

The dis­cus­sions at the Sum­mit homed in on some of the in­ter­nal chal­lenges that in­sur­ers now face in or­der to be ready to ben­e­fit from the de-tar­if­fi­ca­tion in 2016. Two years seems a long time, but for such sig­nif­i­cant change as de-tar­if­fi­ca­tion it is in­deed a short pe­riod be­cause not only do sys­tems need to change but so does the whole sales cul­ture. On the sys­tems side, the tech­ni­cal as­pects have to be com­pleted such as the data anal­y­sis of the claims his­tory of the in­surer, the ac­tu­ar­ial cal­cu­la­tions and judge­ments, the in­ter­nal clas­si­fi­ca­tion of risk cat­e­gories, pric­ing and the de­vel­op­ment and de­ploy­ment of front-end sys­tems. On the sales side, there has to be a cul­tural change from one of sim­ply read­ing off the pre­mium from a tar­iff ta­ble to one of us­ing a front-end risk as­sess­ment or scor­ing sys­tem of pro­pos­als and ex­plain­ing the ben­e­fits of re­lated as­pects to clients such as claims pro­cess­ing speed and so on. This does not mean that ev­ery sales per­son is go­ing to be mak­ing risk as­sess­ment de­ci­sions, but rather they need to de­velop the skills to use the soft­ware so­lu­tions, such as scor­ing sys­tems, that are be­ing de­vel­oped to al­low front line sales people to en­ter the rel­e­vant scores and come up with a risk score or other mech­a­nism on which to base a pre­mium.

HEADS UP GIVEN BY BNM

These sorts of changes can­not hap­pen overnight and if it was a case of start­ing to­day, a two-year lead-up would have been too short. For­tu­nately Bank Ne­gara Malaysia (BNM) sig­nalled the changes to in­dus­try play­ers much ear­lier and has even been pre­par­ing the ground amongst con­sumers. For in­stance, the ini­tial pric­ing im­pact could be an in­crease in pre­mi­ums be­cause mo­tor tar­iffs were static for a very long time. As a prepara­tory step, BNM has brought in grad­ual pre­mium in­creases since 2012 so that there will not be a sud­den shock in­crease to pre­mi­ums in 2016. Con­sumers’ ex­pec­ta­tions may need to be fur­ther man­aged in the run-up pe­riod and the im­pacts of the de-tar­if­fi­ca­tion ex­plained fur­ther to con­sumers.

IN­DUS­TRY’S CON­CERNS OF THE DE-TAR­IF­FI­CA­TION …

The three ma­jor con­cerns at the Sum­mit were re­lated to the pos­si­bil­ity of a price war on the re­moval of the fixed tar­iff sys­tem, the scarcity of the nec­es­sary skills in Malaysia and the lack of ad­e­quately gran­u­lar claims data on which to base pric­ing and re­serv­ing de­ci­sions. In re­spect of a price war it has to be recog­nised that it is an ever-present fact of com­pet­i­tive busi­ness. In fact the price com­pet­i­tive­ness is one of the

Con­sumers’ ex­pec­ta­tions may need to be fur­ther man­aged in the run-up pe­riod and the im­pacts of the de-tar­if­fi­ca­tion ex­plained fur­ther to con­sumers.

di­rect ben­e­fits of de-tar­if­fi­ca­tion for con­sumers. How­ever, any price com­pet­i­tive­ness is un­likely to be large for two rea­sons. Firstly, no­body is go­ing to com­pete on price for the higher risks, af­ter all, no­body wants low mar­gin risks that you know are go­ing to turn into claims. The price com­pet­i­tive­ness is go­ing to be for good risks and mar­gins here could be eroded es­pe­cially in the early days as in­sur­ers vie for mar­ket share in the new en­vi­ron­ment. How­ever, these types of moves even­tu­ally make the in­dus­try more ef­fi­cient as in­dus­try play­ers start con­cen­trat­ing on in­ter­nal costs in or­der to pre­serve their mar­gins in an en­vi­ron­ment where there is price pres­sure. There may also be some con­sol­i­da­tion in the mar­ket, as some play­ers sim­ply can­not make the grade in terms of mar­gin. So the bot­tom line is that there will be more price com­pe­ti­tion, but it al­ready ex­ists in ev­ery other part of the busi­ness and it is not re­ally a new chal­lenge. Ul­ti­mately, it is a good thing for both in­di­vid­ual com­pa­nies and con­sumers alike. Equally, the lack of cer­tain skilled re­sources such as ac­tu­ar­ies can­not be de­nied. For­tu­nately, al­though the skills may not be home grown, they do ex­ist at an in­ter­na­tional level. Malaysia is cer­tainly not the first coun­try to have a non-stan­dard tar­iff ba­sis for pric­ing of mo­tor risks. Whilst for some play­ers ac­cess­ing these in­ter­na­tional skills may be dif­fi­cult, we should also recog­nise that many Malaysian play­ers al­ready have ac­cess to both skills and sys­tems through their over­seas joint ven­tures or own­er­ship struc­tures. The ex­is­tence of over­seas stan­dards in terms of op­er­a­tions, pru­den­tial guide­lines and busi­ness rules also gives the in­dus­try in Malaysia a head start.

REC­OM­MEN­DA­TIONS & MOV­ING FOR­WARD …

In or­der to as­sist in the data area, there were sug­ges­tions at the Sum­mit to col­late in­dus­try-wide sta­tis­tics for use by in­sur­ers in the com­pu­ta­tion of ba­sic claims costs. Gut feel es­ti­mates amongst some del­e­gates at the Sum­mit were that many in­sur­ers might be up to 12 months be­hind in planned de­vel­op­ment to­wards de­tar­if­fi­ca­tion. For these play­ers es­pe­cially, but also for all af­fected in­sur­ers, the mes­sage to take away from the Sum­mit would have been that al­though de­tar­if­fi­ca­tion is a good move which will ben­e­fit them di­rectly, it is not some­thing that is be­ing handed over on a plate. Mak­ing de-tar­if­fi­ca­tion a suc­cess needs fo­cus, in­vest­ment and in­no­va­tive so­lu­tions to the many chal­lenges that are part and par­cel of such sig­nif­i­cant changes.

...the bot­tom line is that there will be more price com­pe­ti­tion, but it al­ready ex­ists in ev­ery other part of the busi­ness and it is not re­ally a new chal­lenge

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