Little change so far in motor insurance pricing
SINCE the beginning of July this year, there has been a lot of talk about the detariffication of motor and fire insurance.
Effective July 1, premiums for Motor Comprehensive and Motor Third Party Fire and Theft products would be set using the riskbased method which takes into account, among others, the driver’s gender, age and occupation; type and make of car; and claims history. In short, the higher the driver’s risk of being involved in an accident, the higher the insurance premium.
When I renewed my two motor insurance policies in September and November for comprehensive covers with my existing insurers, the premiums quoted were the same. The optional covers for windscreen and flood also quoted the same price, which I accepted.
A check with most of the other insurers showed that they are not changing the premium as of now, with their main reason being that they are not ready to employ their risk-based rating tools or they are waiting to see what their competitors would do.
The rates charged for flood cover at 0.50% of the sum insured for the vehicle, and rates charged for windscreen cover at 15% of the windscreen sum insured are exorbitant. The flood cover burning cost (loss ratio) is below 0.20% and the windscreen cover is below 5.00%.
The loss ratio is compiled by Insurance Services Malaysia (ISM) and all insurers have the information. So why are the insurers adopting the same premium despite the detariffication?
One glaring aspect is the fire class, where the burning cost (loss ratio) is below 30% for dwellings, allowing insurers to enjoy a more than 70% margin. With effect from July 1 this year, my current insurer (a major fire underwriter) charged the same premium despite the tariff liberalisation implemented by Bank Negara Malaysia, which allowed insurers to reduce the premium by up to 30%. Why are these benefits not passed on to consumers?
Insurers were given ample notice of the detariffication move by Bank Negara Malaysia and almost all of them are ready with their rating tools and management strategies. So it’s surprising that no one has put the plan into action. Why?
About 72% of the general insurance business are controlled by the top 10 insurers out of a total of 22 industry players while about 94% of the general takaful business are controlled by four takaful insurers out of a total of eight players.
This means the real competition is among the top 10 general insurance players and four takaful players. The way I see it, the only reason for non-competition is to safeguard the current hefty underwriting margin. After all, if everyone is happy with their share of the pie, why disturb that?
Insurers were complaining about the fact that the motor tariffs had not been changed for decades, so why are they now reluctant to implement the actual risk-based pricing for premiums?
On the other hand, rates for fire insurance have not changed for more than 10 years, especially for dwellings. Based on the loss ratio, consumers are paying more than 70% higher premiums previously under the tariff for fire class. Since a differentiating rating can be applied from July 1, why isn’t the risk-based method being adopted?
Another possible reason could be pressure from the intermediaries – the agents who control 70% of the business do not want any reduction since a reduced premium will affect their commission, which is based on the premium charged.
Bank Negara as the regulatory body must ensure that consumers are paying the right premium. It cannot use the so-called cross-subsidy practice (where one group of consumers pays a higher amount so that the price paid by another group can be reduced) from loss-making as the reason. This is unfair and not in spirit with the competition law.
CONCERNED POLICY HOLDER Ampang, Selangor