Challenges Ahead for De-tariffication
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