Insurance: Insurer’s comeback plan

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on September 28, 2020 - October 04, 2020.
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Pacific & Orient Insurance Co Bhd (POI), once a leader in the motorcycle insurance market, has been gradually losing its market share over the years. From holding as much as a 60% share, the percentage has now dropped to 22%.

This inevitably put a huge dent in the profits of its parent company Pacific & Orient Bhd (P&O), an investment holding company that is involved in the business of general insurance, information technology, investment and property. In fact, the company, which has a 51% stake in the insurer and derives most of its profits from it, has been in the red for three out of four financial years from 2016 to 2019.

This year, P&O CEO Chan Thye Seng is looking to tackle the challenge head on and launch what he candidly calls “a counter-­attack”, with the aim of bringing the group back on a growth path. Under his guidance, the general insurer has set its sights on disrupting the car insurance market. In April, POI launched PrOmilej, a first-of-its-kind car insurance product that allows policyholders to choose their premium according to their car’s annual mileage. The product has been well-received in the market since its launch.

The plan gives car owners a discount of between 10% and 40% on the premium that many other car insurance companies in the market typically charge for their products.

“The launch of the product means POI has entered the motor insurance market with a product aimed at disrupting the existing businesses of our competitors,” says Chan.

Noor Muzir Mohamed Kassim, CEO of POI, says with this product, consumers will get the discounts upfront, unlike some other policies that give customers discounts only after a year and if they do not experience any accidents.

The launch of the product is part of the insurer’s broader strategy of leveraging the mass customisation trend. Muzir Kassim says mass customisation means providing more flexibility to consumers to suit their specific needs.

To effectively execute its mass customisation strategy, the company will only be distributing this product online through POI’s website or mobile application.

“It is a direct-to-consumer product, which means consumers cannot get it through any of our agents. This is partly why we can offer our customers up to 40% discount. We reward them with the commissions which are supposed to go to the agents,” Muzir says.

“We believe insurance products should be flexible in terms and premiums so that consumers can pick the best one for themselves, instead of a one-size-fits-all product.”

Muzir Kassim points out that products based on the mass customisation concept have existed in developed markets such as the US and Europe over the last 20 years. It was only recently that POI took the idea and launched it locally.

Photo by Kenny Yap/The Edge

“We could only do it after the first phase of liberalisation of motor insurance by Bank Negara Malaysia in 2016. 

“We thought about how we could take advantage of this. We looked around the world and saw such a product. It is perfect for Malaysia,” he says.

The reasoning behind the product is obvious. The risk of getting into an accident is much lower when an insured car is parked at the owner’s driveway most of the time instead of being driven on the road.

“We did big data analysis by looking at several things, including how many kilometres a driver in Malaysia drives per year [on average] and the [corresponding] accident rates. We then did some customer surveys and decided to launch the product,” says Muzir Kassim.

He adds that the product targets households from the M40 and T20 categories that have a second or third car at home. These could be cars used by wives or husbands who are not working and are taking care of their children.

“They drive these cars for the sole purpose of fetching their children to and from schools, or for grocery shopping. Most of the time, these cars are not on the road,” he explains.

There are also more young working adults who utilise public transport or e-hailing services to commute to work.

“Many of them park their cars at a nearby train station and take the MRT (mass rapid transit) or LRT (light rail transit) to work. Some of them utilise e-hailing services more often when it is more convenient for them to do so.

“More people are driving less as Malaysia becomes a more developed nation,” says Muzir Kassim.

Chan notes that there are 28 million registered vehicles locally, of which about 10 million are cars.

“At least 30% to 40% of these cars are second or third cars being used for household purposes,” he says.

The Covid-19 pandemic has been a blessing in disguise for this product, says Muzir Kassim.

“To tell the truth, we did not expect that the pandemic would benefit our product. People are driving less since the implementation of the MCO (Movement Control Order) in March and that helps our product gain better traction,” he adds.

Muzir Kassim says sales of PrOmilej have been quite good in the past five months and it will continue to gain traction if consumers become more used to purchasing car insurance online.

He adds that its key competitors will find it difficult to replicate such a direct-to-consumer strategy as they rely heavily on agents to distribute their motor insurance products. Many of them are also large companies and listed entities that are less nimble in making major business decisions.

“Let’s say you are the CEO of an insurance company that has a RM1 billion market share in the motor insurance market. Now you want to offer a direct-to-consumer product which is priced at 40% lower than the current premium. What will your shareholders say? Your turnover goes down 40% immediately and you will need to work very hard to bring it back up.

“Some of these companies have several thousand agents to help distribute their motor insurance product. How can they launch such a product without offending their agents? And there will be no money to make if they lower the premium [of their product] by 40% while continuing to pay agents their commissions,” says Muzir Kassim.

According to him, POI is in a unique position to launch PrOmilej as its share of the motor insurance market is small. “We are not alienating our motorcycle insurance agents. And we tell our motor insurance agents that it is a decision that we have to make.”

Chan concurs with Muzir Kassim. “[With the launch of this product and our company strategy] the company (P&O) will return to growth.”

The launch of PrOmilej is just the first initiative from POI in its journey towards transforming itself into a digital-focused insurer. The insurer aims to launch other types of general insurance products via the online channel, says Muzir Kassim.

“For instance, we have started to offer travel insurance policies. You can buy them now if you go to our website,” he explains.

The products that will be launched by the insurer are expected to allow mass customisation, says Muzir Kassim.

“We don’t accept the one-size-fits-all concept anymore. Your insurance needs are not the same as mine. We should be able to offer our customers a decent level of tailoring in order to suit their needs better.

“We have other plans in the pipeline that will disrupt the market. But we can’t reveal too much just yet.”

P&O open to selling its investments if price is right

Pacific & Orient Bhd (P&O), an investment holding company that is involved in the business of general insurance, information technology, investment and property, was loss-making for its 2016, 2018 and 2019 financial years.

The company’s share price has been hovering at around 90 sen since 2016. It plunged to 76 sen in April 24 this year before recovering to 82 sen as at Sept 21.

As P&O generates most of its profits from motorcycle insurance through its subsidiary Pacific & Orient Insurance Co Bhd (POI), the fall in profit is mainly because POI has been losing its dominance in the motorcycle insurance market over the years, says Chan Thye Seng, CEO of P&O.

Noor Muzir Mohamed Kassim, CEO of POI, says its competitors have been slashing prices to gain market share.

“But we stick to our prices to avoid being dragged into a price war. We know how much such a product costs and how we are pricing it. If somebody else is going to take a hit on their profitability to grow their market share, we are not fighting it. That’s why we saw a decline in revenue and profit,” he says.

Chan says these life insurance companies that entered the general insurance space and have a large war chest have been chipping away at POI’s market share for years. He adds that it was in April this year that POI “officially launched its counter-attack” by introducing PrOmilej in the motor insurance market.

Chan and Muzir Kassim are confident that the digital-only, direct-to-consumer product that rewards consumers with a lower premium will contribute positively to the top and bottom lines of both companies.

Muzir Kassim says the amount of money involved in the renewal of motor insurance is more than RM6 billion.

“Assuming that we can take 3% of the market share, it will contribute RM200 million to our top line, which is a significant amount,” he adds.

For FY2019 ended Sept 30, P&O had a turnover of about RM323 million, of which RM309 million was generated by POI.

Chan believes the company’s share price is undervalued.

The company has invested in several companies and start-ups that could boost its profits if they are disposed of at a favourable price, he says.

P&O also has the ability to raise cash by tapping banking facilities or by disposing of shares held by the company.

Chan says the company invested in four start-ups, including HRBoss, which is based in Singapore and provides human resources software for recruiters, and Silicon Markets Ltd, a company in London that provides forex trading systems.

The other two start-ups are Acumentive Ltd, a company based in the UK that provides solutions for real-time asset locating, tracking and management, and Crossflow Energy Solutions, a UK-based company that provides a wind turbine integrated energy system as an alternative for areas that traditionally rely heavily on small-scale diesel power generators.

Chan says these companies have met some of the targets set for them and he is ready to sell them if he receives the right offer.

“As an investment holding company, P&O will only do well if POI does spectacularly well. Or if we sell some of these investments and realise their values.”

He adds that the funds for these investments came from P&O’s sale of a 49% stake in POI in 2013 to Sanlam, a diversified financial services group based in South Africa. News reports stated that the deal was worth about RM270 million.

“We also used the money to invest in the property development business in Miami, Florida,” says Chan.

Based on a news report in February, P&O has received building approval for its land in Miami, earmarked for a residential project. The company is looking to build 54 units with built-ups of 1,300 to more than 7,000 sq ft.

Chan says P&O is in the midst of resolving an easement problem in connection with the land in Miami. An easement is the legal right to use another person’s real property, for a specific purpose and amount of time.

“Once we solve it, we will probably begin construction at the end of the year or early next year. The current value of the land is US$13.8 million. The gross development value [of the project] is US$120 million to US$130 million.”

He adds that he is open to offers to sell the development. “Somebody could walk in and put an offer on the table amid the development [of the property]. I have calculated the numbers. If the offer is attractive, I’ll take the money. Someone has already made enquiries to buy the project from us.”

Chan discloses that the company has the ability to raise cash if necessary by tapping banking facilities. It also has the option to sell its stake in Ancom Bhd if needed.

According to Ancom’s 2019 annual report, P&O owns 20.36% of the company directly and indirectly.

“The shares are unencumbered. I have the ability to raise cash if needed. And we have a lot of unutilised banking facilities,” says Chan.

Asked whether P&O would dispose of its 51% stake in POI, he says it is possible if the offer is attractive. “Anything can be sold if the price is good.”

PrOmilej as a mass customisation product

Pacific & Orient Insurance Co Bhd’s (POI) PrOmilej is a motor insurance product that offers flexible terms and premiums to policyholders based on the maximum distance they travel during a given period.

How PrOmilej works is that its pricing is based on how much a customer intends to drive their car in a year. Noor Muzir Mohamed Kassim, CEO of POI, says customers who drive less than 5,000km a year can buy the PrOmilej Plan 1, which offers them a 40% discount on premium compared with most other car insurance products in the market.

Customers can also opt for Plan 2 or Plan 3, which offer a 20% and 10% discount on premium for an allocated mileage of 10,000km and 15,000km a year respectively.

“PrOmilej policyholders do not need to worry if they drive more than the allocated mileage in their plan. They can pay the difference between the two plans and change to the other,” says Muzir Kassim. However, policyholders are only allowed to top up their existing policy twice.

PrOmilej policyholders should be mindful of exceeding their allocated mileage.

“If you have exceeded your allocated mileage, and you have not topped up your plan, you will only be covered for third-party bodily injury or death and third-party property damage. The loss or damage to your vehicle due to accident, fire or theft is not covered,” Muzir Kassim says.

Under the PrOmilej plan, the owner of a Perodua Myvi aged 35 in Selangor who is entitled to an NCD (no-claim discount) of 55% will need to pay only RM342 a year for driving not more than 5,000km, according to POI’s website. The owner of a Honda City, Toyota Camry and BMW X5 will pay RM508, RM777 and RM3,521 respectively.

The same Myvi driver will have to pay RM513 for PrOmilej Plan 3 and RM761, RM1,165 and RM5,281 if he is driving a Honda City, Toyota Camry and BMW X5 respectively.