A steady shift in the insurance industry

As we enter the next phase of this liberalisation, how prepared are insurers in terms of setting up this new policy and how will they benefit from this liberalisation?

From a quick observation on major banks and insurance agencies in Malaysia, since early July this year, a few major insurance agencies have started holding campaigns to build the awareness of this change in the insurance industry.

According to PIAM, with effect from July 1, 2016, insurers are allowed to introduce new products for both the motor and fire classes.

It also noted that proper vetting and clearance by PIAM on the policy wordings is necessary so as not to create any confusion amongst consumers, especially on the coverage and benefits provided.

In this regard, the association set up an Industry Product Review Board (IPREB) in August 2016 with the objective to review these new product offerings by insurers and to ensure they are in line with the requirements issued by BNM.

“As at to-date PIAM has reviewed the wordings of 45 new Motor products and 21 new Fire products.

“Insurance companies who have had their products approved are launching them based on their targeted launch dates,” Lim revealed.

How will insurers benefit from this liberalisation?

However, after more than 30 years of using the old system, the bigger question here is, why now and how will insurance companies and agents benefit from a de-tariffed motor and fire insurance system?

PIAM answers, as Malaysia progresses towards a developed nation status, the insurance industry has to catch up too by opening up its market to allow a more equitable approach to the charging of premium.

“Any progressive nation has to have an open market to allow competition. Companies should be given an opportunity to compete in the market if they want to grow or progress.

“In addition to providing companies with these opportunities, it also gives consumers an opportunity to sample and purchase products that are unique or special and are customised to suit their needs,” said Lim.

In a liberalised environment, a good risk should be rewarded whilst a bad risk recognised.

“This will result in insured with good risks such as being a good and careful driver paying lesser premium compared to another driver who is in a class that is more likely to experience many accidents.

“If bad drivers reduce their risks they will be rewarded with reductions in their motor premiums,” Lim disclosed.

He also pointed out that improvement in the quality of service is also expected due to greater competition amongst insurers.

Meanwhile, analysts generally viewed that the detarrification of motor and fire insurance is crucial for the insurance industry as it promotes healthy competition amongst insurance players.

While there is a general belief that an open market could entail a destructive price war and the irregular pricing opens up questions on how the products are fairly priced, analysts pointed out that the prices are still monitored and it has to be in line with the capital framework issued by BNM.

In a report earlier this year, Kenanga Investment Bank Bhd’s research team (Kenange Research) opined, “From the pricing perspective, we gather that the new pricing of the new insurance products with more than 10 per cent deviation from the current tariffs are required to go for filing as governed by BNM.

“Subsequent to that, even if pricing deviation more than 10 per cent is technically justifiable, BNM may not approve if this affects the orderly development of detariffication, hence, providing another secure layer in preventing a price war.”

In a separate note, MIDF Amanah Investment Bank Bhd’s research arm (MIDF Research) in a report last year, noted that the pricing of insurance products is still required to fall within the risk based capital framework issued by BNM.

“Thus, it is immensely important for an insurer to invest in technology to build sophisticated pricing mechanisms and to improve its operational capabilities.

“Those lacking in capital to invest to improve their pricing models are likely to face an adverse impact from under-pricing for risk of insurance policies underwritten,” it warned.

Kenanga Research also viewed, for the insurers, while the general view is that the liberalisation may intensify competition, the risk-based capital framework in place coupled with the phased implementation should minimise the impact.