This article first appeared in The Edge Financial Daily on October 31, 2017

KUALA LUMPUR: Bank Negara Malaysia (BNM) governor Tan Sri Muhammad Ibrahim said the insurance community is “meek” in safeguarding the sector’s image and slow in responding to criticisms.

“For the population segments that are being served, making a purchase or a claim is a process fraught with anxiety and headache,” Muhammad said when highlighting some of the issues faced by Malaysians served by the industry.

“Increasing medical insurance premiums have also placed insurers under heightened public scrutiny, with questions raised on the suitainability of product designs that offer little protection against escalating costs of healthcare,” he said.

Launching the seventh Malaysian Insurance Summit yesterday, Muhammad added that insurers’ contracting arrangements with healthcare service providers have also been called into question.

“While insurers might not be the guilty party here, the response to the criticism has been slow and wanting. As a group, the insurance community is meek in safeguarding the sector’s image and reputation,” he said.

Insurance penetration in Malaysia — the ratio of life insurance policies and family takaful contracts to total population — increased from 25.3% in 1996 to 56% in 2016.

From the perspective of the Malaysian population that remains underserved by the insurance industry, the governor said the existing business models are essentially broken.

“While life insurance premiums and family takaful contributions have grown by 48% since 2010, the penetration rate has only increased by five percentage points.

“This indicates that the industry is increasingly concentrated on a narrow insurance segment. If we eliminate double-counting, only 35% of adults have some form of cover. For the rest, products are too complex and remain unaffordable.

“Existing distribution channels also fail to provide adequate access, especially outside urban centres. Technological advancements are not being used to the fullest,” said Muhammad.

The governor said that the central bank will be partnering with the insurance industry to roll out “Perlindungan Tenang”, a national branding and communication platform in the near future. The platform is intended to reach eight million working-age Malaysians and over 700,000 micro enterprises that currently need insurance and takaful protection against key risks.

Products offered under the platform must be affordable, accessible and easy to understand.

“To date, four insurers and two takaful operators have developed products that will be introduced under this initiative and we expect many more to come on board,” said Muhammad.

When it comes to digitalisation to revolutionise customer experience, Muhammad said the insurance and takaful sector needs to play catch up with the banking industry.

Noting that there were 22.8 million Internet banking subscribers, representing over 70% of the total population, in 2016, Muhammad said: “Today, online insurance distribution still accounts for less than 0.1% of business volume. A very poor achievement.”

The governor also pointed out that 2.3 million cheques were issued by insurance and takaful companies in 2016, while 9.8 million cheques were collected by such companies from their customers.

While the decline in cheque collection accelerated from -0.5% in 2016 to -22.1% in the first seven months of 2017, more effective and creative measures are needed to drive cheque usage to negligible levels, said Muhammad.

“To this end, BNM has recently concluded a consultation exercise with the industry on the implementation of an e-Payment Incentive Fund Framework,” he said. “Under the framework, insurance companies shall set aside RM3 for every cheque issued and RM1 for every cheque collected to be used as incentives to encourage their customers, agents, service providers and government agencies to migrate to e-payments.”

He added that the current practice where agents collect premiums from customers in cash and make payments to insurance and takaful companies using the agencies’ own cheques or credit cards should stop.

The governor said that another reason the insurance industry has yet to realise its potential is the lack of long-term commitment from domestic shareholders.

“The industry needs domestic shareholders that have a long-term outlook and can support the deepening of our market. For such shareholders, the pay-offs are likely to be significant given the untapped growth potential,” he said.