MIDF explains effects of de-tariffication of motor and fire insurance tariffs

PETALING JAYA: The first phase of de-tariffication of motor and fire insurance tariffs will financially benefit insurance players as new products are allowed to be priced at market rates.

According to MIDF Research, which has maintained a “positive” call on the insurance sector, the companies that will benefit from the liberalisation exercise will be those that deploy the best pricing strategies and focus on tactical flexibility.

“These players have been investing in technologies to develop premium pricing models and to improve process and delivery channels to sustain profitability growth from the third quarter of 2016 onwards,” it said in a note yesterday.

MIDF said the liberalisation would encourage the increase in number of new insurance products.

“Insurers can freely tailor their new products and price them according to risk profile and customer preferences.

“Correspondingly, this may result in higher premium income and lower claims ratio, which will be beneficial to insurance companies’ bottom line.

“We understand that some opportunists have already made their move to introduce their new products, pending the review by General Insurance Association of Malaysia (PIAM) / Malaysian Takaful Association (MTA) and Bank Negara’s approval.”

MIDF said the overall impact to the industry is still too pre-mature to be determined at this stage.

“Although it is widely expected that the detariffication may literally lead to free competition market and subsequently, price wars for motor and fire tariffs, we opine that this will not happen.”

This is in view of the fact that pricing of insurance products is still required to fall within the risk based capital framework issued by Bank Negara, added MIDF.

“Thus, it is immensely important for an insurer to invest in technology to build sophisticated pricing mechanisms and to improve its operational capabilities.

“Those lacking in capital to invest to improve their pricing models are likely to face an adverse impact from under-pricing for risk of insurance policies underwritten.”

The first phase of the tariff liberalisation effective from July 1, will allow insurers to introduce new products at market rates, while the second phase which will commence the following year, will see the removal of tariff rates for motor comprehensive and motor third party fire and theft policies.

There will also be a gradual adjustment to fire tariff rates in the second phase of the liberalisation.

An analyst with a local bank-backed brokerage said the liberalisation would be good for the industry.

“We expect to see fierce competition as players put forth new products to win customers and fight for a bigger slice of the profit pool.”

He however added that the fierce competition as a result of the liberalisation could result in smaller companies ceasing operations.

Recently, Fitch Ratings said Malaysia’s phased liberalisation roadmap will positively affect the country’s insurance sector by raising insurers’ competitiveness as South-East Asian economic integration sets in.

It said the phased liberalisation would provide motor insurers with greater discretion to adequately price, risks in the near-term while controlled deregulation would protect fire insurers’ profitability from underwriting volatility caused by competitive pricing.