De­tar­if­fi­ca­tion in the Malaysian Gen­eral In­sur­ance Sec­tor: What To Ex­pect?

De­tar­if­fi­ca­tion in the Malaysian Gen­eral In­sur­ance Sec­tor

Insurance - - CONTENTS - Text Ra­jesh Sabhlok | Se­nior Con­sul­tant | In­sur­ance Man­age­ment Con­sult­ing | South-East Asia | ra­jesh.sabhlok@tow­er­swat­ Text Roberto Malat­tia | Direc­tor | Gen­eral In­sur­ance Con­sult­ing | South-East Asia | roberto.malat­tia@tow­er­swat­

Why might Malaysian In­sur­ers’ ex­pe­ri­ence be dif­fer­ent from that ex­pe­ri­enced by China and In­dia fol­low­ing de­tar­if­fi­ca­tion?

One of the main con­cerns aris­ing from de­tar­if­fi­ca­tion is the im­pact on fi­nan­cial vi­a­bil­ity of in­sur­ers1 due to un­healthy com­pe­ti­tion, as ex­pe­ri­enced in other mar­kets such as China and In­dia. How­ever, in com­par­i­son to China and In­dia, the Malaysian gen­eral in­sur­ance mar­ket is gen­er­ally viewed as be­ing rel­a­tively bet­ter placed, go­ing into de­tar­if­fi­ca­tion. Hav­ing a Risk Based Cap­i­tal (“RBC”) Frame­work in place ahead of de­tar­if­fi­ca­tion could to a cer­tain ex­tent re­duce the in­ten­sity of price wars in Malaysia. Ad­di­tion­ally, in pre­par­ing the in­dus­try for de­tar­if­fi­ca­tion, Malaysia stands to ben­e­fit from the ex­pe­ri­ences of other mar­kets. China had to re-in­tro­duce tar­iffs again in 2006 af­ter three years of de­tar­if­fi­ca­tion, to con­trol the ex­tent of losses suf­fered by the in­dus­try on ac­count of fall­ing

prices, in­creas­ing com­mis­sions and other ex­penses. Malaysia, on the other hand, is less likely to ex­pe­ri­ence sim­i­lar sit­u­a­tion.

Fol­low­ing de­tar­if­fi­ca­tion, how are the busi­ness dy­nam­ics ex­pected to change?

De­tar­if­fi­ca­tion will lead to a par­a­digm shift in the man­ner in which gen­eral in­sur­ance busi­ness is car­ried out in Malaysia. This can largely be at­trib­uted to the fol­low­ing of two im­por­tant changes; each of which can have a wide rang­ing im­pact on the rest of the busi­ness: • – With de­tar­if­fi­ca­tion, in­sur­ers are free to de­sign their prod­ucts and also price them dif­fer­ently.

Free com­pe­ti­tion Some in­sur­ers may seek to pur­sue a strat­egy which fo­cuses on in­creas­ing their mar­ket share as against opt­ing for prof­itable growth. Such an ap­proach could trig­ger price wars, at least for prod­ucts that are cur­rently prof­itable, although as noted ear­lier, the pre­vail­ing RBC regime and the ex­pe­ri­ence gained from other de­tar­iffed mar­kets may act as a re­strain­ing fac­tor. In such a sit­u­a­tion, it be­comes even more crit­i­cal for in­sur­ers to fo­cus on im­prov­ing the over­all qual­ity of their book of busi­ness (risk pro­file of cus­tomers). In­creased so­phis­ti­ca­tion is en­vis­aged, par­tic­u­larly in the man­ner in which in­sur­ers un­der­write their prod­ucts (risk se­lec­tion) and how they price them. This is also borne out of the re­cent poll con­ducted by Tow­ers Watson at their Malaysian Mo­tor Pric­ing Sem­i­nar on 8 April 2014, wherein al­most 9 out of 10 of the re­spon­dents in­di­cated that they will use pre­dic­tive an­a­lyt­ics fre­quently. As we draw close to de­tar­if­fi­ca­tion, we are likely to wit­ness a strong pref­er­ence for the use of pre­dic­tive an­a­lyt­ics. • Con­sumer choice – With in­creased com­pe­ti­tion and pres­sure on pre­mium rates, in­sur­ers are likely to in­tro­duce in­no­va­tive vari­ants of cur­rent prod­ucts to dif­fer­en­ti­ate their of­fer­ings. This would re­sult in a sub­stan­tial in­crease in the num­ber of prod­ucts and their vari­ants in the mar­ket for the cus­tomers to choose from, which in it­self is good for them and a con­se­quence of a free mar­ket, but with choice comes the usual chal­lenge of be­ing able to make in­formed de­ci­sions. Over­time cus­tomer buy­ing be­hav­iour is ex­pected to change; with the avail­abil­ity of choices and in­creased mar­ket­ing ef­forts by in­sur­ers to pro­mote their prod­ucts, cus­tomers will start to shop around and eval­u­ate op­tions be­fore mak­ing their pur­chase de­ci­sions. In order to ef­fec­tively op­er­ate in such an en­vi­ron­ment, in­sur­ers would need to re­visit their prod­uct, cus­tomer and dis­tri­bu­tion strate­gies as the “one size fits all” ap­proach will need to be re­placed with a more dis­cern­ing ap­proach, where the mar­ket­ing mix and strate­gies are aligned to the vary­ing needs and re­quire­ments of in­di­vid­ual cus­tomer seg­ments.

How is the im­pact of de­tar­if­fi­ca­tion on the pre­mium level ex­pected to dif­fer across prod­uct lines?

For Mo­tor in­sur­ance, the over­all im­pact is un­pre­dictable at this stage. It is how­ever pos­si­ble that the Mo­tor-Act cover, if de­tar­iffed, can wit­ness sig­nif­i­cant rate in­creases. This can be negated by po­ten­tial rate de­creases in Mo­tor Non-Act cover, es­pe­cially for the pri­vate car (and po­ten­tially, mo­tor­cy­cle) seg­ment. There is cur­rently sig­nif­i­cant cross-sub­sidi­s­a­tion be­tween Mo­tor Non-Act cover and Mo­tor Act cover but this is ex­pected to re­duce in the long run. The com­mer­cial ve­hi­cles seg­ment is likely to ex­pe­ri­ence rate up­lifts as it is un­der-priced. Ac­cord­ing to a re­cent poll con­ducted by Tow­ers Watson, over 45% of the gen­eral in­sur­ance pro­fes­sion­als polled ex­pected mo­tor pre­mium

rates to de­crease; around 35% of them fore­cast rates to in­crease, whilst the rest felt that mo­tor pre­mium level will re­main broadly un­changed. The sur­vey it­self shows that there is a sig­nif­i­cant de­gree of un­cer­tainty and dis­sention in the im­pact of de­tar­if­fi­ca­tion for Mo­tor in­sur­ance. As for Fire In­sur­ance the gen­eral con­sen­sus is that rates will de­crease over­all, es­pe­cially for the tar­iffed res­i­den­tial and com­mer­cial busi­ness lines which are sub­stan­tially prof­itable. As for res­i­den­tial cover, the rates are ex­pected to de­crease steadily over time as this is typ­i­cally sold in con­junc­tion with mort­gages through a ban­cas­sur­ance chan­nel, where gen­er­ally com­pe­ti­tion may be lim­ited due to strate­gic part­ner­ships. For the tar­iffed com­mer­cial busi­ness, the rate de­crease is ex­pected to be at a faster pace. Although cur­rently there are some flex­i­bil­i­ties in rate set­ting for self-rated and spe­cially rated risks, com­pe­ti­tion will in­ten­sify, if in­sur­ers are al­lowed free­dom to set their own prices with­out con­sid­er­a­tion of tar­iff rates.

What is the ex­pected im­pact of de­tar­if­fi­ca­tion on dis­tri­bu­tion chan­nels?

As noted ear­lier, de­tar­if­fi­ca­tion will re­sult in in­creased com­pe­ti­tion amongst in­sur­ers, en­hanced prod­uct dif­fer­en­ti­a­tion and evolv­ing cus­tomer pref­er­ences. In such sce­nario, the role of the dis­trib­u­tor be­comes even more crit­i­cal as they can as­sist cus­tomers to navigate through the myr­iad of prod­uct choices, as well as act as the flag bearer of their re­spec­tive prin­ci­pals in suc­cess­fully pro­mot­ing their prod­ucts in a fiercely com­pet­i­tive mar­ket. The dis­tri­bu­tion chan­nel mix for Malaysia has re­mained rel­a­tively sta­ble over the last five years. Agents (in­clud­ing Mo­tor Ve­hi­cle Fran­chisees) have ac­counted for about 60% of the to­tal GWP. How­ever, the chan­nel mix is ex­pected to see some shifts in favour of “provider ag­nos­tic” chan­nels, such as Bro­kers and Banks, who can po­si­tion them­selves as act­ing in the in­ter­est of the cus­tomer while help­ing them iden­tify the best prod­uct from the sev­eral op­tions that are avail­able in the mar­ket. Given the like­li­hood of the shift­ing of cus­tomer pref­er­ences and the adop­tion of cus­tomer seg­ment level mar­ket­ing strate­gies by in­sur­ers, one can ex­pect newer dis­tri­bu­tion mod­els to emerge such as affin­ity mar­ket­ing, tele­mar­ket­ing, work­site mar­ket­ing etc.

If de­tar­if­fi­ca­tion also in­cludes free­ing up com­mis­sions of­fered to in­ter­me­di­aries, then in­sur­ers may start of­fer­ing higher com­mis­sions to at­tract and re­tain dis­trib­u­tors, fur­ther strain­ing the over­all prof­itabil­ity of the in­sur­ers or value of­fered to the cus­tomers or both. The in­dus­try is cur­rently of the view that com­mis­sions would ei­ther re­main the same or in­crease post de­tar­if­fi­ca­tion.

Will there be con­sol­i­da­tion in the mar­ket on ac­count of de­tar­if­fi­ca­tion?

Con­sol­i­da­tion is pos­si­ble and the key driv­ers for the same in­clude: • In­abil­ity of an in­surer to com­pete in a free mar­ket sit­u­a­tion due to lack of in­ter­nal ca­pa­bil­i­ties and re­sources to help de­velop and sus­tain com­pet­i­tive ad­van­tage in the mar­ket. • Cap­i­tal con­straints – in­abil­ity of an in­surer to sup­port the in­vest­ments re­quired for build­ing ca­pa­bil­i­ties nec­es­sary to suc­cess­fully com­pete in the mar­ket, viz. tech­nol­ogy, soft­ware, peo­ple etc. to im­prove their over­all op­er­a­tional ca­pa­bil­i­ties. • Max­imis­ing syn­er­gies – in­sur­ers with com­pli­men­tary ca­pa­bil­i­ties may con­sider merg­ing to fur­ther strengthen their ca­pa­bil­i­ties and cre­ate a larger and stronger uni­fied en­tity which can suc­cess­fully com­pete and grow in a com­pet­i­tive en­vi­ron­ment.

The com­pet­i­tive edge of­ten be­longs to in­sur­ers

with plat­forms that of­fer the flex­i­bil­ity to de­ploy their pric­ing strate­gies or to fo­cus on tac­ti­cal changes ei­ther to re­act to a po­ten­tial un­ex­pected ad­verse mar­ket move­ment or to ex­ploit mar­ket op­por­tu­ni­ties that have not

been spot­ted by com­peti­tors yet.

What would dif­fer­en­ti­ate suc­cess­ful in­sur­ers from the rest in a de­tar­iffed en­vi­ron­ment?

Greater rate dif­fer­en­ti­a­tion as a re­sult of de­tar­if­fi­ca­tion is mak­ing many for­ward-think­ing in­sur­ers in­creas­ingly con­scious of the im­por­tance of data-driven strate­gies, risk seg­men­ta­tion and its de­pen­dence on pre­dic­tive an­a­lyt­ics. Those us­ing less-so­phis­ti­cated pric­ing mech­a­nisms face an in­creased chance of ad­verse se­lec­tion with the po­ten­tial for a higher-risk and in­creas­ingly un­der-priced book of busi­ness. The com­pet­i­tive edge of­ten be­longs to in­sur­ers with plat­forms that of­fer the flex­i­bil­ity to de­ploy their pric­ing strate­gies or to fo­cus on tac­ti­cal changes ei­ther to re­act to a po­ten­tial un­ex­pected ad­verse mar­ket move­ment or to ex­ploit mar­ket op­por­tu­ni­ties that have not been spot­ted by com­peti­tors yet. Close to 57% of the re­spon­dents felt that they would need to change their rates ev­ery three months or less to be com­pet­i­tive in a de­tar­iffed en­vi­ron­ment. Speed to mar­ket will be of essence. An­a­lyt­ics and sys­tems are yet sim­ply tools which can­not be solely de­pend­able. These need to be part of a holis­tic strat­egy that cre­ates a more fac­tual and mea­sur­able busi­ness process and de­ci­sion-mak­ing cul­ture. The strat­egy should also out­line chal­lenges and op­por­tu­ni­ties clearly, quan­tify ex­pected costs and ben­e­fits and iden­tify the ap­pro­pri­ate key per­for­mance in­di­ca­tors im­pacted by the var­i­ous strate­gic

To suc­ceed in a de­tar­iffed en­vi­ron­ment, in­sur­ers will need to re­visit their over­all cus­tomer, prod­uct & dis­tri­bu­tion strate­gies and de­velop a mar­ket­ing mix which is tar­geted at the level of in­di­vid­ual cus­tomer seg­ments as the needs, pref­er­ences, and buy­ing be­hav­iour of cus­tomers might dif­fer across seg­ments.

work streams. An or­gan­i­sa­tion must com­mit to cre­at­ing and cap­i­tal­is­ing on an­a­lytic ca­pa­bil­i­ties, such as: Plan­ning, re­sources and im­ple­men­ta­tion must in­te­grate busi­ness strat­egy, or­gan­i­sa­tional changes, vi­sion and busi­ness cul­ture, en­ter­prise risk and data man­age­ment, hu­man cap­i­tal, ex­per­tise and train­ing.

What are the key ar­eas that the in­sur­ance com­pa­nies need to con­sider in pre­par­ing for de­tar­if­fi­ca­tion?

Some of the key ar­eas where com­pa­nies will need to fo­cus on in pre­par­ing them­selves for de­tar­if­fi­ca­tion in­clude: • Busi­ness Strat­egy Devel­op­ment - To suc­ceed in a de­tar­iffed en­vi­ron­ment, in­sur­ers will need to re­visit their over­all cus­tomer, prod­uct & dis­tri­bu­tion strate­gies and de­velop a mar­ket­ing mix which is tar­geted at the level of in­di­vid­ual cus­tomer seg­ments as the needs, pref­er­ences, and buy­ing be­hav­iour of cus­tomers might dif­fer across seg­ments. • Data & Man­age­ment In­for­ma­tion Devel­op­ment – Build­ing sys­tems, pro­cesses and re­port­ing frame­work for min­ing ex­ist­ing cus­tomer data­base and mon­i­tor­ing port­fo­lio health on an on­go­ing ba­sis, in order to help the com­pa­nies to proac­tively re­spond to the mar­ket changes. • An­a­lyt­ics & De­ci­sion Frame­work Devel­op­ment – Us­ing an­a­lyt­ics to seg­ment cus­tomers, scor­ing agents and dis­trib­u­tors, re­view­ing the im­pact of pric­ing strate­gies through sce­nario test­ing, us­ing tech­nol­ogy to aid de­ci­sion mak­ing etc. to help fa­cil­i­tate man­age­ment de­ci­sions that are sup­ported by deep anal­y­sis and think­ing. • Im­ple­men­ta­tion – Speed to mar­ket and agility to swiftly change prices are crit­i­cal suc­cess fac­tors in an un­reg­u­lated mar­ket. How­ever, up­grad­ing sys­tems nor­mally is very oner­ous, and re­quires sig­nif­i­cant in­vest­ments, re­sources and process reengi­neer­ing. Web­based tech­nol­ogy can also be con­sid­ered as an al­ter­na­tive ap­proach. This al­lows in­sur­ers to re­place their rat­ing en­gines with­out hav­ing to reengi­neer their whole ad­min­is­tra­tion sys­tems and still al­low in­sur­ers to im­ple­ment dy­namic, real-time pric­ing di­rectly from their cur­rent sys­tems and op­er­ate in a com­pet­i­tive pric­ing en­vi­ron­ment at a frac­tion of the cost re­quired for an en­tire IT plat­form up­grade. • Process En­hance­ments & Con­sol­i­da­tion – It is crit­i­cal for in­sur­ers to build sys­tems, pro­cesses and gov­er­nance frame­works to sup­port the devel­op­ment, im­ple­men­ta­tion and mon­i­tor­ing of the com­pany’s strate­gies. Some of these are re­flected in the re­sults of the re­cent poll, where around 40% of the re­spon­dents felt that Data Qual­ity is their big­gest con­cern when it comes to pre­par­ing for de­tar­if­fi­ca­tion, fol­lowed by lack of ex­per­tise within the firm. In­sur­ers are aware that con­stant im­prove­ment of data is es­sen­tial to rely on data-driven strate­gies and pre­dic­tive an­a­lyt­ics and are ex­pected to make con­certed ef­forts in this area to sup­port their strate­gic in­tent of ef­fec­tively us­ing pre­dic­tive an­a­lyt­ics go­ing for­ward.

1 Through­out the ar­ti­cle, words or phrases like ‘in­sur­ers’ or ‘in­sur­ance com­pa­nies’ used in the con­text of Malaysia would im­ply both con­ven­tional and taka­ful com­pa­nies

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