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