Investment Highlights

• The industry continues to gradually shift towards a fully market-based pricing for fire and motor insurance. Effective from 1 October 2022, pricing of products for these 2 segments (fire and motor) will be further liberalised (Phase 2A). Under Phase 2A, tariff for fire-tariff products will be reduced by 15%. We gathered that only selected trade codes for fire and lightning perils will be impacted. Also, the pricing for non-tariff fire products will be amended to a range of up to - 30% from the new tariff rate (revised fire tariff 2.0). This removes the ability to charge a premium of up to +30% from the fire tariff rate as in Phase 2. Commencing from 1October 2022, the pricing flexibility for motor will be increased to a range of up +/- 15% from the tariff. This will be higher compared to up to +/- 10% from the tariff currently under Phase 2.
• With effect from 1 July 2023, Phase 2B will kick in with greater pricing flexibility for motor products. In Phase 2B, the pricing for both fire and non-tariff products will be subjected to no more than -30% from the revised fire tariff 2.0. At the same time, the pricing range for motor products will be increased to within +/- 20% from the tariff (see Exhibit 2). The increase in pricing flexibility for motor will be subjected to insurance companies committing to reforms, thus improving the efficiency of motor claims.
• The transition to Phase 2 of the liberalisation for fire and motor tariffs commenced from 1 July 2016. Recall, from July 2016, premiums or takaful contribution rates of new fire and motor products of general insurance and takaful operators (ITO) were no longer subjected to tariffs. New products introduced by the licensed ITOs were able to be priced based on the insurers’ individual risk pricing models subject to the limits and conditions set by Bank Negara Malaysia (BNM).

• Presently, the general ITOs are in Phase 2 in terms of the pricing flexibility allowed for fire and motor insurance products. As seen from Exhibit 2, fire tariff products are currently priced based on the revised rates. In contrast, new or non-tariff fire products are allowed to be priced with a flexible range of within +/- 30% from the adjusted tariff rates. Meanwhile, Phase 2 of the liberalisation has provided insurance companies the leeway to price motor insurance (excluding third party products) within the band of +/- 10% from the tariff rate.

• We expect LPI Capital to be more impacted from the adjustment in fire pricing compared to Allianz Malaysia and Syarikat Takaful Malaysia Keluarga (STMK) based on a higher mix of fire tariff policies comparatively as it is a key player in the fire insurance segment, ranking 1st in the industry.

• Maintain NEUTRAL on the sector with challenges remaining. This includes ongoing uncertainties of FRS 17, higher claims which are normalising after the reopening of economy and the continued liberalisation which will exert pressure on the pricing for fire and motor products of ITOs moving forward. We continue to be selective on stocks for this sector and Allianz Malaysia (FV: RM17.40/share) is our top pick with undemanding valuation trading at 0.5x FY23F P/BV and decent dividend yield of 5.5%. Allianz has a commanding market share ranking no.1 in the general insurance which will place the company in a stronger position to withstand pricing competition from the gradual liberalisation of fire and motor tariffs as well as consolidation of players in the industry. Also, we expect Allianz to be less negatively impacted by the implementation of FRS 17.

Source: AmInvest Research - 29 Sept 2022