PIAM answers about detariffication

Question 1

Insurance firms starting July 2016 can decide the motor insurance without using their tariff table. What sort of early issues that we can expect from the de-tariffication practice? 

 

Answer 1

The liberalisation of the Motor and Fire Tariffs, will be managed through a phased approach to allow time for consumers and industry to adjust to the new operating environment.

In the first phase of the Liberalisation Roadmap, starting 1 July 2016, insurers will be allowed to offer new products at market rates where a variety of new motor and fire products is expected in the market for consumers to choose from, depending on what they deem important for their needs. (Note: Only new product will be without tariff.)

A year later, premium rates for Motor Comprehensive and Motor Third Party Fire and Theft products will be detariffed. However, existing motor products (Act Cover, Comprehensive, Third Party Fire and Theft, and Third Party) will continue to be made available. 

A more gradual adjustment will be made for some vehicle classes under Motor Third Party, which remain substantially underpriced (for every ringgit of premium received, insurers and takaful operators are paying between RM1.30 to RM3.00 in claims). This is to avoid sharp upward price adjustments if this class is immediately detariffed. For most vehicle classes, the adjustments will be similar in quantum to the adjustments made from 2012 to 2015 under the New Motor Cover Framework approved by the Economic Council in 2011.

To allow insurers time to rebalance their portfolios gradually, premium rates for the Fire class shall also continue to be regulated under the tariff with gradual adjustments until a review is made in 2019.

The progress of liberalization will be reviewed in 2019 with an assessment of the impact on consumers and industry before full liberalization takes place.  

 

Question 2 & 3

Is the insurance industry in the country is ready for the detarification? Why? Would there be a huge competition among the insurance companies?

 

Answer 2 & 3

Discussions on detariffication between the industry and Bank Negara had taken place since 2013. Various measures have been taken at individual company level to build internal capabilities to operate in the new environment. 

Under a deregulated environment, competition is expected to intensify.

In the competitive environment, the industry will experience greater flexibility to price motor and fire products which in turn drive more benefits to the consumers.

It will also allow insurers to price risk according to risk profile allowing consumers with lower risk profiles to enjoy lower premium rates.

Competition will encourage insurers to innovate products catering for segments of market which was previously uninsurable.

This will also drive insurers to implement efficiency improvements and adoption cost-effective distribution channels.

In conclusions, consumers with different needs and preferences will benefit from having greater product choice.

 

Question 4

How about the margins, can we expect at least a temporary erosions of margins? (Any forecast figures?)

 

Answer 4

Insurance companies in Malaysia are closely regulated by Bank Negara Malaysia and have adequate measures and guidelines in place to ensure proper and prudent underwriting. Companies will be responsible enough to ensure that these requirements are met. 

Any diverse underwriting which does not commensurate with a risk will result in insurers requiring to make higher reserves under the Risk Based Capital Framework.

Margin erosion could potentially be addressed via implementation of cost savings measures that would enhance efficiency.

 

Question 5

Would the detarification process will led to smaller firms closing shop? How big is the smaller firms’ contribution to the domestic insurance industry?

 

Answer 5

From the industry’s statistics, 2015, 65% of the motor portfolio is underwritten by the 7 largest general insurance companies in Malaysia.  Given that a major portion of this portfolio is taken up by these large insurance companies, the impact of liberalization on smaller firms will be minimal. 

The lead time given will allow space for the industry to set their business strategy.

 

Question 6

Would the motor insurance still be the growth driver for the industry, with the detarification in place?

 

Answer 6

Motor insurance is a mandatory class of business and has the largest share of 46% of the total market.  Yes, with the introduction of new products, there will be an additional boost to grow this class.

 

Question 7

What is your outlook for the GI this year? And how would be the performance from Motor Insurance this year?

 

Answer 7

The Association’s forecast for the general insurance industry growth this year is 2.5% to 3.5%.  As explained above, motor insurance will continue to be a significant driver for growth alongside the other classes of business.