A fruitful event. Kenanga Research hosted a group of analysts and fund managers to its Corporate Luncheon on 29th March 2017. Our event was themed “What to expect from the Liberalisation of the Motor and Fire Tariffs”, where much were discussed on the insurance industry prospects as well as the opportunities and threats from the liberalisation of the Motor and Fire tariffs from both Insurers and consumers perspectives. For the event, we were graced with the participation of Persatuan Insurans Am Malaysia (PIAM), the national trade association of all licensed direct and reinsurance companies for general insurance in Malaysia as well as Syarikat Takaful Malaysia (TAKAFUL), the leading Takaful operator in Malaysia.

Key points were focused on the growth of General Written Premiums (GWP) within the General insurance space and Takaful insurance; where the growth momentum of GWP for the combined segments has been on the downtrend. This was mainly due to the shrinking growth from the lion’s share Motor insurance segment (commanded 46% in General and 60% in Takaful insurance in 2016) on lower total (automotive) industry volume numbers (-13%). To curb the industry downtrend, we understand that PIAM is working to grow the non-traditional segment (such as cyber insurance and terrorism) where vast opportunities can be explored given the under-explored areas. For 2017, while it is still too early to gauge the growth rate as the liberalisation for premium rates for Motor comprehensive and Motor third-party fire and theft product will only start from 1 July 2017, we believe that the growth rate should be higher than last year, moving in tandem with our Automotive TIV growth forecast of 2%.

Phased liberalisation of the general insurance industry in Malaysia. In a nutshell, liberalisation of the tariff means removing the tariff structure or freeing up the fixed premium rates so that insurance companies are able to charge premiums that commensurate or correspond to the risk behavior of the consumers. This also implies that different insurance companies can charge different rates for the same risk behavior based on their business risks models and strategies. In March 2016, Bank Negara Malaysia (BNM) announced the phased liberalisation of the motor and fire tariffs before transitioning to a fully liberalized environment. It will be implemented in a phased approach to allow time for consumers and industry to adjust to the new operating environment. In the first phase, starting 1 July 2016, insurers will progressively offer new products to the consumers at market rates. Existing Motor Third Party product and Motor Comprehensive and Motor Third Party Fire and Theft product will continue to be made available. Subsequently after a year, starting 1 July 2017, premium rates for Motor Comprehensive and Motor Third Party Fire and Theft product will be liberalised. Meanwhile for Fire class insurance, it will continue to be regulated under the tariff with gradual downward adjustments until a review is made in 2019. This is to allow insurers time to rebalance their portfolios gradually. The progress of liberalisation will be reviewed in 2019 with an assessment of the impact on consumers and industry before full liberalisation takes place.

Both speakers highlighted the importance of the detarrification; that is to promote competitive and innovative insurance and takaful sectors and more importantly, to pave the way for the pricing of motor and fire insurance protection which is more reflective of risks behaviour of the consumer. Note that the plan of detariffication has been on discussion, with industry engagement together with BNM on the Roadmap since 2013. After careful consideration and studies, BNM has issued a policy document on the 30th June 2016, which aims to: (i) maintain an orderly market, (ii) moderate the increased competition and enables industry and consumers to adapt the changes gradually as well as (iii) minimise risk of policy reversal and resistance from both stakeholders and adverse public reaction. To recap, poor implementation of detariffication by two countries during the year 2003 and 2007 have led to aggressive premium reduction. As a result, a price war happened which led to many closure of smaller insurance firms; with government’s intervention eventually to reintroduce detarrification. With Risk Based Capital (RBC) framework in place coupled with the phased implementation approach, we believe that Malaysia is unlikely to follow in the footsteps of the two countries mentioned above.

In terms of the implications of to the industry, five outcomes are expected; with (i) differentiated rates to be priced according to risk profiles, (ii) wider range of motor and fire products to be introduced, (iii) higher efficiency level from insurers, (iv) diversified delivery channels as well as (v) expanded role of intermediaries. In fact, our channel checks reveal that the insurers have been investing in new systems which aim to improve the group’s operational efficiency as well as enabling for more services rollout (i.e. claims through internet portal). Meanwhile, actuarial team with new systems have also been the area of investment focus which will be the enabler for best pricing and product strategies. Meanwhile from the consumers’ perspective, consumers with good track of record will not only benefit from having greater product choice, higher service level and improved accessibility of coverage but to benefit from varying coverage limits which is customised to match individual risk profiles.

Post-discussion, we see the phased liberalisation of the motor and fire as a crucial move to ensure competitive yet conducive environment for both insurers as well as customers. As for the insurers, while the general view is that the liberalisation may intensify competition, we believe the risk-based capital framework in place coupled with the phased implementation should minimise the impact. From the pricing perspective, we gather that the new pricing of the new insurance products with >10% deviation from the current tariffs are required to go for filing as governed by BNM. Subsequent to that, even if pricing deviation >10% 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.

Source: Kenanga Research - 31 Mar 2017