PETALING JAYA: The de-tariffication of the motor and fire insurance premiums is still seeing the finer points being worked out and would incorporate premium bands to prevent the risk of under-pricing of premiums.
Industry players also expect the de-tariffication to come on stream by the middle of next year.
The move to incorporate premium bands would reduce the severe margin erosion for general insurers that have higher exposure to motor premiums.
RHB Research analyst Kong Ho Meng told StarBiz that one of the reasons Bank Negara was looking into the premium bands, was to ensure that the general insurance industry would not suffer with full de-tariffication, which happened in India and China when motor premiums were totally abolished in the absence of strong regulatory capital enforcement.
“Therefore, the risk of the industy under-pricing will be mitigated by applying premium bands, improving underwriting standards and enforcement of strict capital buffering requirements.
“We think the premium band is essentially a form of restricted deviation on premium change for motor and fire insurance products.
“Hence, insurance players should not under-price a product if it bears a high loss ratio and places a heavy strain on its capital adequacy ratio (CAR),” he added.
The insurance industry CAR has improved to 254% in 2014 from 246% in 2013.
The general insurance CAR last year stood at 274% (2013:235%) while the life insurance CAR remain unchanged at 262%. Both CAR figures were higher than the past five-year average.
According to Bank Negara, the surge in the general insurance CAR is partly due to refinements in the treatment of premium liabilities under the risk-based capital framework.
Kong believes that the de-tariffication will be a partial and gradual one and there could be a slight margin erosion, although the risk of severe erosion in the industry due to irrational competition is eliminated.
This would augur well for banking group like AMMB Holdings, as the country’s largest motor insurer, Allianz and Hong Leong Financial Group due to their relatively higher exposure to motor insurance.
He also added the research house was retaining its views of a slight decline in underwriting margins for general insurers for the financial year (FY) 2016 from FY2015, although it does not foresee further downside risks in margins in FY2016.
As with other industry observers, Kong agreed that the de-tariffication could materialise in the second half of next year based on channel checks.
Meanwhile, given the higher CAR for general insurance, RHB Research said “This is a leading indicator that the industry players may be adding further buffers to preserve capital in anticipation of uncertainties.
This include the industry de-tariffication and a possible indication of heightened competition given that some insurance players may have greater appetite to underwrite riskier businesses.
The brokerage has pegged its stocks to a 13-24 times sector price earnings (PE), with stocks such as LPI Capital Bhd with its high dividend payouts and superior margins due to a high mix of fire insurance portfolio.