The phased liberalisation of motor and fire tariffs announced by Bank Negara Malaysia (BNM) last year, which kicked off with the first phase on July 1, 2016, is set to move to the next phase on July 1 this year.
Phase two of the programme, which is working towards the eventual removal of motor and fire tariffs by 2019, will see premium rates for motor comprehensive being liberalised, with pricing being determined by individual insurers and Takaful operators based on a risk-based assessment system.
From July 1, 2017, how much one pays for insurance will no longer be determined by fixed price lists, but by his or her risk profile. This means that theoretically, no two insurers will have identical pricing for a motor comprehensive policy.
Premium rates for motor third-party policies will however continue to be regulated and subject to tariff rates, with a gradual increase in pricing over time – the insurance industry has stated that the segment is “substantially underpriced” at present and immediate detariffication will result in a sharp price hike.
While insurance companies haven’t yet revealed specifics of how their motor comprehensive premiums will be tailored and more importantly, how this will translate into pricing for the consumer, BNM has suggested some initial details on how the liberalised landscape will shape up.
At a press briefing on the subject last Friday, the central bank said that the move towards liberalisation has long been overdue, and the switch to a risk-based assessment system will bring about innovation and be much more beneficial to consumers.
“The reality is that the premiums that are collected today and the claims that are paid, particularly for bodily injury claims, have a great disparity. It has been there for a long time, when you consider that we have not touched pricing since 1978. Over the long term, this is not going to be sustainable,” BNM assistant governor Jessica Chew said.
She explained that the opening of the market “will allow insurers to take into account a broader set of risk factors, and what it will do is to reduce the cross subsidisation between business classes as well as risk groups.”
It is also targeting at improving safety on the road, incentivising good risk management and inculcate safer driving habits. What this will do is reward good drivers with no history of claims or reckless driving and bring about higher premiums to those with the opposite, ensuring that things – and pricing – are more equitable and fairer than that in place now. “This will allow consumers from the low-risk groups to enjoy lower premiums,” she said.
Under the new environment, more risk factors are set to be taken into account in determining premiums. Other than the sum insured, cubic capacity of the engine as well as the age of vehicle and the driver, premiums may be driven by other factors. These could be safety and security features in the vehicle, duration that the vehicle is on the road geographical location (areas with higher incidents of theft) and traffic offences on record.
Similar to the system employed in countries like the UK, factors such as these will define the risk profile group of the policy holder, which will then help determine the premium. Since insurers and takaful operators will have different ways of defining the risk profile group, the price of a motor policy will differ from one insurer to another.
Enhancements to consumer protection will also be introduced, to ensure proper governance over product design and pricing. Insurers are expected to assess the risks appropriately and consistently for fair treatment of consumers. The standard scope of coverage disclosure will be increased, so consumers can easily compare between insurers to make informed purchasing decisions.
While insurers will be able to determine how their products are fleshed out as well as the rates of the premiums, consumers don’t have to fear a sharp spike in pricing with the removal of tariffs. The central bank will provide the necessary input to ensure that pricing in the new market doesn’t become a free-for-all.
“All insurance companies will have to file their products and their rates with BNM, which we will then look at. This will give us the opportunity to review the risk factors that they take into account and how they are actually being translated into the pricing. We will ensure that the adjustments are both reasonable and gradual. Excessive adjustments are something that we will be seeking to tamper,” Chew explained.
The central bank expects that there will be no massive shift in pricing, and if anything believes that prices may go down in the short term as a result of competition between insurers.
For consumers, this will mean more choices to pick from at competitive prices, with the ability to shop around for coverage that best meets their insurance needs. “Consumers should benefit from the more liberalised market where you have more control over what you pay for,” Chew said.
Modernisation will bring about a more varied and improved landscape, bringing about better service quality and customer experience. “We need this environment because only then can we see more innovation in our market and this will allow consumers to have more choices in terms of the types of cover they want to buy instead of a standardised product,” she added.
Still, mirroring the earlier call made by the General Insurance Association of Malaysia (PIAM), the central bank advises consumers shouldn’t just be looking at pricing as the only factor when purchasing a motor insurance plan, and that they should pay attention to all aspects of coverage, including exclusions.