We  are  slightly  surprised  by  a  Focus  Malaysia  article  which  reported that  several  motor  insurers  have  started  imposing  loading  based  on broad-based  terms  rather  than  full/multi-criteria  practices.  This  may intensify  competition  in  the  near  term.  We  note  that  the  industry  is developing  a  Motor  Pricing  Model,  expected  to  be  rolled  out  by  2014. We believe it will be a risk-based pricing, which is fairer to customers.    

- Testing the market. Recall that the removal of motor and fire insurance tariff by 2016 may alter competition as insurers would be able to charge motor/fire premiums using free market forces. If what the article says is true, it could be a sign that some industry players are starting to consider unconventional  strategies  to  test  the  market.  However,  a  broad-based pricing would put an unfair insurance cost burden on “good risk” vehicle owners with low claims experience. 

- Will  competition  intensify?  We  believe  the  broad-based  term  pricing may  intensify  competition  in  the  motor  insurance  industry  in  the  near term.  However,  as  the  practice  of  broad-based  term  pricing  could  turn away good customers, we support a multi-criteria risk-based pricing. The purpose  of  the  de-tariffication  is  to  allow  the  market  to  determine  fairer premium  rates  according  to  the  risk  profile  of  the  insurance  claims. Vehicle  owners  with  good  risks  should  enjoy  better  premium  rates compared to those with bad risks. A risk-based pricing strategy coupled with  consumer  awareness  should  also  help  reduce  accident  rates,  as vehicle  owners  will  be  more  cautious since  more  accident claims  would translate  into  higher  premiums.  The  major  downside  for  insurers  to perform  the multi-criteria  pricing  is  the  need  for  scale and  technological capabilities.

- ISM  studying  Motor  Pricing  Model.  Nevertheless,  we  believe  such consumer  concerns  are  short-lived.  Based  on  Insurance  Services Malaysia (ISM) July 2013 issue, the industry is working with ISM – which has  the  vehicle  valuation  database  –  to  develop  an  industry  Motor Pricing Model. This model is expected to go live in 1QCY14. A price war is  also  unlikely  as  the  local  industry  is  well  aware  of  the  de-tariffication issues  in  other  countries,  where  high  volatility  in  market  premium  rates and strategic errors have impeded future industry development. 

- Favouring  strong  underwriters.  Our  stance  is  unchanged  as  we continue  to  favour  insurers  with  a  track  record  of  superior  underwriting strength  and  ample  economies  of  scale  and  expertise  to  carry  out  risk-based pricing. These features  will help any insurer overcome unhealthy competition.  Our  Top  BUY  remains  Syarikat  Takaful  Malaysia  (STMB MK,  FV:  MYR11.00)  with  our  FV  pegged  to  14x  FY14  EPS,  given  its strong foothold in the fast-growing takaful industry. 

Source: RHB