- Why might Malaysian Insurers’ experience be different from that
experienced by China and India following detariffication?
One of the main concerns arising from detariffication is the impact on
financial viability of insurers1 due to unhealthy competition, as
experienced in other markets such as China and India. However, in comparison to China and
India, the Malaysian general insurance market is generally viewed as being
relatively better placed, going into detariffication. Having a Risk Based
Capital (“RBC”) Framework in place ahead of detariffication could to a certain
extent reduce the intensity of price wars in Malaysia. Additionally, in
preparing the industry for detariffication, Malaysia stands to benefit from the
experiences of other markets. China had to re-introduce tariffs again in 2006
after three years of detariffication, to control the extent of losses suffered
by the industry on account of falling prices, increasing commissions and other
expenses. Malaysia, on the other hand, is less likely to experience similar
- Following detariffication, how are the business dynamics expected to
Detariffication will lead to a paradigm shift in the manner in which general
insurance business is carried out in Malaysia. This can largely be attributed to
the following two important changes; each of which can have a wide ranging
impact on the rest of the business:
- Free competition – With detariffication, insurers are free to design their
products and also price them differently.
Some insurers may seek to pursue a strategy which focuses on increasing their
market share as against opting for profitable growth. Such an approach could
trigger price wars, at least for products that are currently profitable,
although as noted earlier, the prevailing RBC regime and the experience gained
from other detariffed markets may act as a restraining factor.
In such a situation, it becomes even more critical for insurers to focus on
improving the overall quality of their book of business (risk profile of
customers). Increased sophistication is envisaged, particularly in the manner in
which insurers underwrite their products (risk selection) and how they price
This is also borne out of the recent poll conducted by Towers Watson at their
Malaysian Motor Pricing Seminar on 8 April 2014, wherein almost 9 out of 10 of
the respondents indicated that they will use predictive analytics frequently. As
we draw close to detariffication, we are likely to witness a strong preference
for the use of predictive analytics.
How much do you think you will be using predictive analytics by
- Consumer choice – With increased competition and pressure on premium rates,
insurers are likely to introduce innovative variants of current products to
differentiate their offerings. This would result in a substantial increase in
the number of products and their variants in the market for the customers to
choose from, which in itself is good for them and a consequence of a free
market, but with choice comes the usual challenge of being able to make informed
Overtime customer buying behaviour is expected to change; with the availability
of choices and increased marketing efforts by insurers to promote their
products, customers will start to shop around and evaluate options before making
their purchase decisions.
In order to effectively operate in such an environment, insurers would need to
revisit their product, customer and distribution strategies as the “one size
fits all” approach will need to be replaced with a more discerning approach,
where the marketing mix and strategies are aligned to the varying needs and
requirements of individual customer segments.
- How is the impact of detariffication on the premium level expected to
differ across product lines?
For Motor insurance, the overall impact is unpredictable at this stage. It is
however possible that the Motor-Act cover, if detariffed, can witness
significant rate increases. This can be negated by potential rate decreases in
Motor Non-Act cover, especially for the private car (and potentially,
motorcycle) segment. There is currently significant cross-subsidisation between
Motor Non-Act cover and Motor Act cover but this is expected to reduce in the
long run. The commercial vehicles segment is likely to experience rate uplifts
as it is under-priced. According to a recent poll conducted by Towers Watson,
over 45% of the general insurance professionals polled expected motor premium
rates to decrease; around 35% of them forecast rates to increase, whilst the
rest felt that motor premium level will remain broadly unchanged. The survey
itself shows that there is a significant degree of uncertainty and dissention in
the impact of detariffication for Motor insurance.
What will be the impact of detariffication on average fire insurance
As for Fire Insurance the general consensus is that rates will decrease overall,
especially for the tariffed residential and commercial business lines which are
substantially profitable. As for residential cover, the rates are expected to
decrease steadily over time as this is typically sold in conjunction with
mortgages through a bancassurance channel, where generally competition may be
limited due to strategic partnerships. For the tariffed commercial business, the
rate decrease is expected to be at a faster pace. Although currently there are
some flexibilities in rate setting for self-rated and specially rated risks,
competition will intensify, if insurers are allowed freedom to set their own
prices without consideration of tariff rates.
What will be the impact of detariffication on average motor
insurance premium level?
- What is the expected impact of detariffication on distribution channels?
As noted earlier, detariffication will result in increased competition
amongst insurers, enhanced product differentiation and evolving customer
In such scenario, the role of the distributor becomes even more critical as they
can assist customers to navigate through the myriad of product choices, as well
as act as the flag bearer of their respective principals in successfully
promoting their products in a fiercely competitive market.
The distribution channel mix for Malaysia has remained relatively stable over
the last five years. Agents (including Motor Vehicle Franchisees) have accounted
for about 60% of the total GWP. However, the channel mix is expected to see some
shifts in favour of “provider agnostic” channels, such as Brokers and Banks, who
can position themselves as acting in the interest of the customer while helping
them identify the best product from the several options that are available in
Given the likelihood of the shifting of customer preferences and the adoption of
customer segment level marketing strategies by insurers, one can expect newer
distribution models to emerge such as affinity marketing, telemarketing,
worksite marketing etc.
If detariffication also includes freeing up commissions offered to
intermediaries, then insurers may start offering higher commissions to attract
and retain distributors, further straining the overall profitability of the
insurers or value offered to the customers or both. The industry is currently of
the view that commissions would either remain the same or increase post
What will be the impact of detariffication on commission level?
- Will there be consolidation in the market on account of detariffication?
Consolidation is possible and the key drivers for the same include:
- Inability of an insurer to compete in a free market situation due to lack of
internal capabilities and resources to help develop and sustain competitive
advantage in the market.
- Capital constraints – inability of an insurer to support the investments
required for building capabilities necessary to successfully compete in the
market, viz. technology, software, people etc. to improve their overall
- Maximising synergies – insurers with complimentary capabilities may consider
merging to further strengthen their capabilities and create a larger and
stronger unified entity which can successfully compete and grow in a competitive
- What would differentiate successful insurers from the rest in a detariffed
Greater rate differentiation as a result of detariffication is making many
forward-thinking insurers increasingly conscious of the importance of
data-driven strategies, risk segmentation and its dependence on predictive
analytics. Those using less-sophisticated pricing mechanisms face an increased
chance of adverse selection with the potential for a higher-risk and
increasingly under-priced book of business.
The competitive edge often belongs to insurers with platforms that offer the
flexibility to deploy their pricing strategies or to focus on tactical changes
either to react to a potential unexpected adverse market movement or to exploit
market opportunities that have not been spotted by competitors yet. Close to 57%
of the respondents felt that they would need to change their rates every three
months or less to be competitive in a detariffed environment. Speed to market
will be of essence.
How often do you think companies will need to change their rates in
a detarrifed environment?
Analytics and systems are yet simply tools which cannot be solely dependable.
These need to be part of a holistic strategy that creates a more factual and
measurable business process and decision-making culture. The strategy should
also outline challenges and opportunities clearly, quantify expected costs and
benefits and identify the appropriate key performance indicators impacted by the
various strategic work streams. An organisation must commit to creating and
capitalising on analytic capabilities, such as: Planning, resources and
implementation must integrate business strategy, organisational changes, vision
and business culture, enterprise risk and data management, human capital,
expertise and training.
- What are the key areas that the insurance companies need to consider in
preparing for detariffication?
Some of the key areas where companies will need to focus on in preparing
themselves for detariffication include:
- Business Strategy Development - To succeed in a detariffed environment,
insurers will need to revisit their overall customer, product & distribution
strategies and develop a marketing mix which is targeted at the level of
individual customer segments as the needs, preferences, and buying behaviour of
customers might differ across segments.
- Data & Management Information Development – Building systems, processes and
reporting framework for mining existing customer database and monitoring
portfolio health on an ongoing basis, in order to help the companies to
proactively respond to the market changes.
- Analytics & Decision Framework Development – Using analytics to segment
customers, scoring agents and distributors, reviewing the impact of pricing
strategies through scenario testing, using technology to aid decision making
etc. to help facilitate management decisions that are supported by deep analysis
- Implementation – Speed to market and agility to swiftly change prices are
critical success factors in an unregulated market. However, upgrading systems
normally is very onerous, and requires significant investments, resources and
process reengineering. Web-based technology can also be considered as an
alternative approach. This allows insurers to replace their rating engines
without having to reengineer their whole administration systems and still allow
insurers to implement dynamic, real-time pricing directly from their current
systems and operate in a competitive pricing environment at a fraction of the
cost required for an entire IT platform upgrade.
- Process Enhancements & Consolidation – It is critical for insurers to build
systems, processes and governance frameworks to support the development,
implementation and monitoring of the company’s strategies.
Some of these are reflected in the results of the recent poll, where around 40%
of the respondents felt that Data Quality is their biggest concern when it comes
to preparing for detariffication, followed by lack of expertise within the firm.
Insurers are aware that constant improvement of data is essential to rely on
data-driven strategies and predictive analytics and are expected to make
concerted efforts in this area to support their strategic intent of effectively
using predictive analytics going forward.
What is your biggest concern in preparation of detariffication?
1 throughout the article, words or phrases like ‘insurers’ or
‘insurance companies’ used in the context of Malaysia would imply both
conventional and takaful companies
Note: This article was also published in the Insurance Magazine in Malaysia
(July-August 2014 issue).
Rajesh and Roberto lead the Towers Watson team that assists General Insurance
and Takaful companies across South East Asia in preparing for detariffication.
For further information email SEA.Marketing@towerswatson.com.