The Phased Liberalisation of the Motor and Fire Tariffs announced by Bank Negara Malaysia (BNM) in June last year is a game changer for the insurance industry, and detariffication will impact almost everyone – those with home loans, vehicle owners and business owners nationwide. It’s a major shift for the insurance industry, as motor and fire classes account for 65% of the general insurance market.

In the very near future, how much one pays for insurance will no longer be determined by fixed price lists, but by his or her risk profile. This risk-based assessment is already present in many countries, and it “rewards” those who are perceived to be low risk with lower premiums, vice versa. It is hoped that this will incentivise consumers to improve their risk profile. There will also be increased competition among insurance companies, which will be free to adopt market-based pricing.

The first phase started in July 2016. “In the first phase of liberalisation which started from July last year, insurers have been allowed to introduce new motor and fire products, and price them at market rates. These new products are subject to a review of the policy wordings, definitions and terminologies by PIAM to ensure consistency and avoid confusion among consumers. Subsequent approval from BNM on the pricing is required before the products are launched to the public,” General Insurance Association of Malaysia (PIAM) CEO Mark Lim explained.

From L-R: PIAM deputy chairman Chua Seck Guan, PIAM chairman Antony Lee

The second stage, which will start from this July, will see rates for Motor Comprehensive and Motor Third Party Fire and Theft products liberalised. The central bank opines that current rates for comprehensive motor insurance are close to technical market rates, and there should be no sharp adjustments once the tariffs are removed.

However, Motor Third Party insurance will continue to be regulated, as this segment is currently “substantially underpriced” and immediate detariffication will result in a sharp price hike. Payouts are higher than premiums collected (for every RM1 of premium received, insurers are paying between RM1.30 to RM3.00 in claims, PIAM says) and current prices are unsustainable in the long term. Expect a gradual increase in prices for third party insurance.

The association has pledged to work closely with BNM to ensure an orderly transition to a liberalised environment. Shopping around and comparing motor insurance products with different prices and features will be alien to consumers, which makes education key.

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According to PIAM chairman Antony Lee, a National Consumer Education Campaign will be rolled out soon to raise awareness on the phased liberalisation with focus on its objectives, benefits and expected outcomes.

Lee, who is also CEO of AIG Malaysia, added that it would be important for consumers to be aware of their insurance needs and risk priorities so that they can make informed decisions given the wide choice of products and covers. Consumer engagement and empowerment will be the key differentiating factors in an open and highly competitive marketplace, he said.

Speaking to reporters at PIAM’s 2016 industry results media briefing yesterday, Lee said that a possible challenge facing insurers when detariffication happens is if consumers simply opt for the lowest priced product without taking into account the amount of cover. Price driven consumers must remember that “you get what you pay for,” he said, adding that if all goes well, full liberalisation will happen in 2019.

More details will be needed, especially in the risk assessment part. What’s certain is that it’s interesting times ahead for both the industry and consumers.