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KUCHING: The possible General Insurance (GI) detariffication of motor and fire insurance is likely to be ‘partial’ as there will be premium bands to prevent the risk of under-pricing premiums relative to risk.
Hence, analysts observed that this eliminates the risk of a probable severe GI margin erosion due to irrational competition.
RHB Research Sdn Bhd’s (RHB Research) channel checks suggest that the GI detariffication of motor and fire insurance may materialise in the second half of 2016 (2H16).
“Theoretically, GIs should not under-price a product if it bears a high loss ratio and places a heavy strain on its capital adequacy ratio (CAR).
“This effect caused the collapse of the GI industry in other countries when they experienced full detariffication together with absent strong regulatory capital enforcements.
“BNM is aware of this fact and stated that the risk of industry underpricing would be mitigated by applying premium bands, improving under-writing (UW) standards and continuing to enforce 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,” the research firm explained.
It added, “Given the higher CAR for GI, we take it as a leading indicator that the industry players may be adding further buffers to preserve capital in anticipation of uncertainties – which amongst others include the industry detariffication for GI and the life insurance (LI) framework for LI, and possible indication of heightened competition, given that some insurance players may have greater appetite to underwrite riskier businesses.”
Taking into account the possible changes in product pricing and competition, RHB Research said it expected the detariffication to not only be ‘partial’ but also gradual.
“We retain our assumption of a slight decline in UW margins for the GI insurers in the financial year 2016 (FY16) from FY15, though we do not foresee further downside risks in margins in FY16,” it said.
The research firm projected a six to nine per cent gross premium growth for GI and general takaful (GT) insurers in FY15, in line with the softened economic growth similar to FY14’s.
Meanwhile, on the growth of LI and family takaful (FT), RHB Research said the insurances’ long-term growth is expected to be anchored by low penetration.
It explained, “According to Life Insurance Association of Malaysia (LIAM), the low penetration rate, which is 54 per cent of the population insured, indicates that LI and FT players have more opportunities to reach out to policyholders in urban, suburban and rural areas.”
LIAM also believes that the remaining 46 per cent could be concentrated in rural areas.
RHB Research said, “Additionally, developing products to suit the different life stage needs of customers and introducing new delivery channels to reach out to this 46 per cent is possible.
“Cross-selling initiatives could also be leveraged for the 54 per cent insured to cater for areas of insurance needs that are still inadequate.
“All these are in line with our own estimates of Malaysia’s low LI and FT penetration rate of 54 per cent of the population insured, 3.1 per cent premium to gross domestic product (GDP) and 1.59-times sum insured over gross national income per capita for 2014.”
The research firm also believed Malaysia’s LI’s longterm growth could be dictated by a rising middle income population as the United Nations sees Malaysia reaching ageing population status by 2030.
It noted ageing population status is more than 15 per cent of the population age is more than 60 years old.
Aside from that, the research firm highlighted that mergers and acquisitions (M&A) have multiplied for insurers in the past few years at an averaged 2.3-folds P/BV, with transactions for GI and GT reportedly between 1.1 to 2.4-folds and LI and FT said to be higher at two to 3.2-folds.
It projected a moderate sector earnings growth of eight to nine per cent from its double-digits forecasts.