In July 2017 Peak Re received its licence from the Labuan Financial Services Authority to establish a branch for general insurance business in Malaysia. This approval coincides with important changes beginning to affect the country’s non-life insurance market. Over the course of the coming years Malaysia’s motor and property lines will undergo a phased detariffication, presenting both challenges (e.g. increased pressure on rates) and opportunities (e.g. the scope for risk-based pricing). Based on our global expertise and strong capital base, Peak Re is looking forward to supporting its clients in transitioning to this new business environment.
According to Franz-Josef Hahn, CEO of Peak Re, as one of the fastest growing regions in the world, the ASEAN markets and Malaysia in particular play an important role in the company’s growth strategy. The Labuan licence affirms Peak Re’s commitment to the Malaysian market, assuring utmost proximity to locally operating insurers. The branch will provide Malaysian clients with immediate access to the full-service proposition of Peak Re and its three- pronged underwriting approach comprising rigorous portfolio and risk analytics, market knowledge and product underwriting. In addition, the Labuan licence will strengthen Peak Re’s ability to access business opportunities arising from the wider ASEAN region. Malaysia’s insurance sector is considered as one of the most advanced and robust markets in the ASEAN region. Equally, its insurance regulator, Bank Negara Malaysia (BNM) is applauded for its highly professional market oversight. As a forerunner of Risk Based Capital (RBC) solvency regulation, introduced as early as 2009, it assures both a proper capitalisation of regulated entities and sophisticated corporate risk management practices, to the ultimate benefit of the policyholder.
Malaysia’s insurance sector continues to mature
In addition, looking back on a remarkable journey, Malaysia’s economy having sustained steady average growth of about 6.4% per year since 1970. Growth has moderated in recent years at 4.2%, but it still remained robust in 2016. In 2017 and 2018, the Malaysia’s economy is expected to continue expanding by 4.3% and 4.7%, respectively (source: World Bank).
Today, gross national income per capita of its 32 million population stands at USD 9,850. Absolute poverty has been largely eliminated. Almost 50% of the population are categorised as middle class (according to BCG), well ahead of its ASEAN peers, excluding Singapore. While private consumption remains the country’s growth engine, the government’s attention is shifting from reducing inequality to sustainable improvements in individual and societal well-being. Changes to insurance regulation are part of this structural reform.
Malaysia’s current insurance penetration is at 4.8%. Although this is still below the global average at 6.3%, it is already well ahead of the average for emerging markets worldwide at 3.2% and of Asia’s emerging markets at 3.7% (source: Swiss Re Sigma). Rates are depressed, given the unabated inflow of capacity in search of growth. As a result, at 3.7% annually, Malaysia’s non-life insurance markets have grown slightly slower than GDP from 2011 – 2016 whereas life insurance outpaced economic growth at a 4.8% rate of expansion.
Compared with other ASEAN markets the consolidation of Malaysia’s insurance industry is fairly advanced. In non-life insurance, the top five companies account for 50% of the market share. Similarly to Indonesia, motor insurance is the largest business line with a share of 46% of premiums, followed by property with 19% of premiums.
Phased detariffication of motor and property insurance
As initially announced in 2012 and confirmed in its Financial Stability and Payment System Report 2015, BNM started a phased liberalisation of motor and fire tariffs, commencing in July 2016. The gradual detariffication brings to an end a 30 years-old practice of regulatory price setting in both lines of business. For motor insurance, the tariff regime has resulted in claims exceeding premiums by a wide margin. According to BNM for every single Ringgit (RM) paid in premiums, claims in third-party bodily injuries amounted to RM 1.30 to RM 3.00.
The rate liberalisation aims to close that gap and gradually move tariffs towards a more appropriate level commensurate with drivers’ individual risk profiles, reducing the current practice to cross-subsidise the tariff lines. In addition, the BNM hopes that the detariffication will also spur the introduction of a broader and more flexible product offering, incentivise proper risk management among the insurers and encourage safer driving.
In the first phase of the liberalisation from July 2016 to July 2017 rates were still fixed for existing products, but insurers were already allowed to introduce new products at market rates. Since July 2017 premium rates for Motor Comprehensive and Motor Third Party, Fire and Theft are liberalised. Prices for Motor Third Party are gradually adjusted upwards by the BNM, until the progress of liberalisation will go through a final assessment to determine the readiness of consumers and industry for full liberalisation eventually.
For fire insurance, the practice has been slightly different. Only policies of less than RM 20 million (USD 4.7 million) were subject to the tariff. Above this threshold there was no rate regulation. Besides, the line was regarded as profitable. Similarly to motor insurance, as of July 2016 new products were allowed to be offered at market rates. As of July 2017, rates will be gradually adjusted for identified risk groups by BNM.
Introducing risk based pricing
For both lines, the liberalisation will not necessarily translate into higher rates. Quite the contrary. According to a recent poll conducted by Willis Towers Watson, insurers may seek a strategy to grow their market share and thus decrease rates. In fact, in fire business 80% of the insurers polled expect that prices will decline. In motor insurance, there is a controversial discussion, with 45% of the executives interviewed expecting rate decreases and 35% foreseeing increases.
Peak Re’s commitment to the market
In order to succeed in the new deregulated environment, insurers will have to introduce risk-based pricing and strengthen their underwriting as well as their risk selection and risk management processes. Ultimately, they will have to strike the right balance between their top and bottom line objectives. Reinsurance can support this process as detariffication will result in an increased volatility of insurers’ earnings and solvency position. As a reinsurer in Malaysia, Peak Re is looking forward to supporting its clients with proactive approach throughout this critical transition period.
We are here to provide solvency relief products that enable cedants to meet tighter capital requirements and solvency position. Peak Re is committed to establishing long-term partnership and growing along with our cedants, and we understand the importance of knowledge transfer and exchange that we are happy to support our partners on training and education in specialty areas with Peak Re’s expertise.
