Thursday, October 19, 2017

Peak Re: Responding to risk-based pricing in Malaysia

Malaysia’s phased liberalisation of motor and fire tariffs is set to create significant market pressure for insurance companies operating in the country. The winners will be those companies that successfully manage the transition to a more customer-focused strategy.

A key factor in achieving this will be investment in technology to develop appropriate risk-based pricing models and to improve distribution, claims management and operational efficiency. Reinsurers will be crucial partners both as advisers and as providers of the capital needed to make such investments.

“Cedents are asking how to respond,” says Jasmine Miow, Principal Officer of Peak Re’s Labuan branch. “Detariffication will certainly create competition, but it is good for the market. We’re going to see more tailored products, more innovation — and insurers are going to have to think more creatively.”

For the past three decades, motor and fire premiums in Malaysia have been regulated by a tariff structure that has resulted in a growing gap between premiums collected and claims paid out by insurers. In particular, the motor third-party business has become unsustainable — for every ringgit of premium received, insurers and takaful operators are paying between M$1.30 to M$3 in claims.

Under the tariff system, insurance premiums were calculated on narrow measures such as a driver’s age and accident history, with a maximum no-claims discount of 55%. From July 1, 2017, premium liberalisation for comprehensive and third-party fire and theft products will allow insurers and takaful operators to take other risk factors into account, such as engine size, vehicle age, safety and security features, geographical location and so on.

The high profits of the tariff regime reduced the incentive for innovation within the sector and constrained the development of more efficient operations. As detariffication is brought in, insurers are already focusing on how to differentiate their product offering to appeal to consumers and becoming more sophisticated in the way they operate. Business models are shifting from a focus on volume to profitability.

Liberalisation will necessitate a more sophisticated approach to distribution channels, particularly online, and insurance companies will need to tailor their approach to the customer segments they identify as core to their strategy. “Customers are becoming more informed and insurance companies are going to have to work hard to win them over,” says Miow.

As customer behaviour changes in the post-tariff market, companies will need to think about distributing products in a way that maximises convenience by leveraging smartphones and other online platforms.

Claims management
As pricing comes under pressure it is critical that insurers are focused on managing claims costs, as well as minimising the expenses associated with handling claims. In a competitive market environment, good claims settlement can be a key differentiator in terms of leadership and innovation. Moreover, managing claims well is also important for ensuring customer satisfaction. One negative experience can quickly become a social media phenomenon, so it is important to strive for a consistent focus on customer service throughout the claims process, while also balancing costs.

Risk management
Good risk management is not simply about minimising risk. It is imperative that senior management clearly articulate their risk appetite and have an idea of the customers they want to target — whether they are high risk or low risk — depending on the capital they have available. Cultivating a good risk culture and strong governance will help insurers deliver products that customers want, at the same time as providing comfort to stakeholders and regulators.

Data and information strategy
Investing in upgrades to data and IT systems is essential. Good systems and processes, combined with an analytic approach, are the key to identifying changes in customer behaviour and being able to respond quickly. In the digital age, insurance companies that want to be seen as customer-centric need to be data-driven.

“With real-time data, insurers can be more accurate, more analytic and deliver more value to the customer,” says Miow. “Insurance companies need to change and become more forward-looking. You can’t just think about what is good for the company — you need to adopt a mindset that is focused on the customer.”

This will clearly take time, but the important element is to identify the goal and begin moving in the right direction.

Of course, there is a cost attached to almost all of the elements discussed above, but not every company will be able to access the capital needed to make these types of significant investments while maintaining their solvency ratios, but there are other options. “As a reinsurer, we are happy to help business partners by offering solvency margin products for companies that want to expand their business looking at maximizing capital relief efficiency or without raising new capital,” says Miow.

Jasmine Miow, principal
officer for Labuan, Peak Re

General enquiry:
Tel: +852 3509 6666



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