Pay for motor insurance based on risk profile — PIAM

This article first appeared in The Edge Financial Daily, on May 8, 2017.
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KUALA LUMPUR: Come July 1, insurers can adjust the pricing and range of products insured for two motor insurance policies — comprehensive cover and third-party fire and theft cover — under the second stage of the Phased Liberalisation of the Motor and Fire Tariffs announced by Bank Negara Malaysia last year.

This will be a departure from the existing system where the tariff focuses only on the type and age of car, engine capacity and previous records of motor insurance claims under the no-claim discount.

General Insurance Association of Malaysia (PIAM) chief executive Mark Lim is positive about the transition, saying the move has trickle-down effects from the changes companies will make to price motor insurance premiums towards the number of accidents — and eventually, the number of claims.

The move allows insurers to adjust prices based on risk profiles, Lim told The Edge Financial Daily. “Insurance is about pooling of risk. When you open up, there are now going to be more factors to determine your risk profile,” he said.

“Companies can look at other things like your driving records, the kind of behaviour, how often you use the car, the distance you travel, among others,” said Lim.

Turning towards risk-based pricing will push more people to become alert drivers, Lim opined, as insurers will increasingly reward low-risk drivers. “High-risk drivers will feel concerned because good drivers will be rewarded and bad drivers will be affected — their premium will go up.

“If you belong to the pool of low-risk drivers who do not have many claims, you should enjoy a lower premium. If you are in the bad risk pool, you should rightfully pay [a] higher premium,” he said.

He pointed out that insurers are aware that good drivers expect some benefits from a lower premium. “Let’s say I don’t drive a lot. I’m a safe driver. I am likely to gain because I can choose among insurers, and they will need to fight for my business, or another insurer will give a better offer,” he added.

But what about fixed factors, such as gender and parking location? Lim assured that there are existing technologies to assist insurers for a more unbiased assessment.

“One of the new developments is that they will put telematics into your car, and your driving style is recorded. So, they are able to pinpoint good drivers who deserve [a] lower premium based on driving habits,” he said.

While telematics is still new in Malaysia, Lim noted that a number of insurers in neighbouring Singapore already offer the device to be placed in vehicles as part of the insurance package.

These new technologies, said Lim, can only be practical in the absence of the existing tariff. “How can we bring in new technology when you still have an old tariff table? So, we are freeing up these two [policies]. Then, we can embrace all these new technologies.”

Apart from allowing risk-based pricing, the presence of telematics and data-logging will allow insurers to develop products that can be catered to different groups to improve efficiency and pricing strategies.

One example, said Lim, is in Europe, where usage-based insurance is applied, such that the premium is based on how often a vehicle is on the road. “These are the things that Malaysia needs to start looking into. We are not there yet, but this opening of the tariff will pave the way for us.”

Lim also brushed off claims that motor insurance prices will balloon following the tariff liberalisation, saying that any huge increases will need to be screened by the central bank. “Bank Negara is very concerned about the impact on prices. It is not a free-for-all; they are very clear about their safeguards,” he said.

He added that the cheapest motor insurance coverage policy — third-party — is not affected by the liberalisation this year, due to difficulties for a suitable price adjustment.

“It is a very difficult class. We have to be careful because that will have [a] social impact. Many consumers in that segment have less room to pay more, and yet they need the insurance cover to use their vehicle.

“By 2019, if Bank Negara sees [that] the market is very stable and there is no fierce price war, they may eventually open up all classes of motor insurance totally,” said Lim. “But it depends on market conditions.”

As of now, Lim said, insurers may collect relevant data when customers apply for motor insurance.

“But going forward, they will build up their own data as well, as the most important factor here is driving habits,” said Lim, which he hopes will change as the liberalisation progresses.

“When good risk drivers maintain their record and bad risk drivers start to change their driving habits, eventually the number of accidents will go down,” he said. “We hope this will reduce the number of accidents and fatalities on the road.”

Less accidents also mean less claims — and rightfully so. The motor insurance segment contributed RM9 billion in premiums last year, near 46% of total industry premiums. With total claims still above the RM5 billion mark, or RM13.8 million a day, it will be interesting to see whether the liberalisation will help liberalise the biggest — and most draining — insurance segment in the near future.