Transforming the insurance landscape
As the global economy shifts, financial markets across the world are constantly introducing new policies and changes to its systems to ensure that the financial cogwheels continue to turn.
The same can be said for Malaysia as the whole financial sector is currently undergoing several changes to its regulations, system and its sub-segments, including its insurance industry.
Undoubtedly, the insurance sector is one of the most important growth driver of Malaysia’s overall financial services sector.
Based on Bank Negara Malaysia’s (BNM) 2016 annual insurance statistics, Malaysia’s total insurance fund assets in 2016, amounted to 5.2 per cent of the nation’s financial system.
The insurance sector also contributes about 20.9 per cent to Malaysia’s total gross national income (GNI) in 2016.
According to BNM, Malaysia’s insurance industry is now going through one of its most significant transformation, possibly since the early 1990s when the insurance regulatory system in Malaysia was overhauled.
This transition comes in place at a time when the insurance industry is said to be at its ‘down time’, remaining stagnant for the last few years after several years of positive earnings growth.
BNM highlighted this phenomenon last year, at the 6th Malaysian Insurance Summit, as it pointed out that Malaysia’s insurance sector is following an ‘S-curve’ trajectory.
“Growth in both the life and general insurance markets would significantly outpace the economy, ascending the steep slope up the ‘S-curve’.
“Since then, total assets of the insurance and takaful sector have expanded at an annual rate of 13.3 per cent, more than tripling in value from RM52 billion in 2000 to RM181 billion in 2010,” BNM’s Governor Datuk Muhammad Ibrahim said in his keynote address for the 6th Malaysian Insurance Summit.
In more recent years however, this growth has started to plateau, he pointed out.
The life insurance penetration has remained stagnant at 55 per cent for the past few years, while in the general insurance sector, domestic capacity for larger and more specialised risks appears to be reaching its limits.
“This in turn has contributed towards sustained reinsurance outflows which have an impact on the country’s long term current account balances.
“Based on our observations, the industry appears to be approaching the point of inflection in the ‘S-curve’.
“Yet we know that its growth potential remains significant, with Malaysia still a long way from being a saturated market. This suggests that the industry is ripe for transformation to a new growth trajectory. The industry in essence has not delivered the required results,” he highlighted.
With that, BNM and members of the insurance industry have already started taking steps that are critical to revamp its system, to ride out the industry’s current dormant state.
In March last year, BNM had introduced the phased liberalisation of the motor and fire tariffs before transitioning to a fully liberalised market.
To note, the motor and fire insurance represent more than 60 per cent of the total general insurance market.
Previously, according to the General Insurance Association Malaysia (PIAM), for the past three decades, the premiums which insurance companies can charge consumers have been regulated by a tariff structure. This has resulted in a growing gap between premiums collected and claims paid out by motor insurers as well as volatility in the Motor Third Party business.
It is hoped that with the introduction of this new phased liberalisation of the motor and fire insurance, consumers and businesses would be able to enjoy wider options for their insurance coverage.
At the same time, insurers could benefit by introducing more packages to better fit the consumers’ risk profile, and different income and age groups while a liberalised market could encourage healthy competition amongst insurance companies.
“The implications of the reform are much wider than just an adjustment to premium levels. It will pave the way for a new wave of product innovation, significantly expanding choices for consumers.
“It will improve incentives for safe driving behaviours and better risk management practices by both risk owners and insurers. And it will address market distortions which have threatened access to motor insurance, particularly for higher risks.
“This is also a time when businesses and households are facing rising costs and more uncertain conditions which can adversely affect discretionary spending on insurance.
“At the same time, the exposures of households and businesses which insurance is designed to protect, have actually increased as evidenced by more frequent and severe incidents of natural and man-made disasters,” said BNM assistant Governor Jessica Chew in her keynote address at the General Insurance Agents Convention – ‘Distribution in a Liberalised Environment’.
From July 1, 2017, the second phase of the liberalisation of motor and fire insurance tariffs have started and it involves the gradual adjustments of tariffs, with emphasis on third party insurance products.
With that, BizHive Weekly takes a closer look at how this change will affect consumers, businesses as well as insurance companies:
“Based on our observations, the industry appears to be approaching the point of inflection in the ‘Scurve’.Yet we know that its growth potential remains significant, with Malaysia still a long way from being a saturated market.This suggests that the industry is ripe for transformation to a new growth trajectory.” Datuk Muhammad Ibrahim, BNM Governor