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Interview with the Regulator: Reducing the protection gap

Source: Asia Insurance Review | Sep 2017

Malaysia Life & Health Property & Casualty Regulation C-Suite

Addressing the protection gap will continue to be a key focus area for Bank Negara Malaysia (BNM), says Mr Yoon Yew Khuen, Director of Insurance Development, in an exclusive interview with Asia Insurance Review where he stresses the need to bring to the market products and services that increase the affordability and accessibility of insurance. Engaging customers and enhancing their experiences are also key to boosting insurance.
By Dawn Sit
Q: In 2016, general insurance premiums rose by 1.1% to MYR17.67 billion (US$4.1 billion), while life insurance premiums grew by 6.9% to MYR9.75 billion (US$2.3 billion) (new business premium basis). How did the market perform and which areas need improvement?
   The Malaysian insurance and takaful sector has a strong financial footing and is well-positioned to grow further, recording a positive growth not only in terms of premiums, asset size and profitability, but also in terms of capitalisation. 
   In 2016, the total insurance premiums and takaful contributions increased by 4.4% while the asset size of both sectors grew by 5%. General insurers recorded a 24.6% growth in their operating profit. The industry’s aggregate Capital Adequacy Ratio (CAR) stood at 243.9%, well above the minimum of 130% with a surplus in capital of MYR37.9 billion (US$8.8 billion).
   The industry has responded well to the increasingly dynamic operating landscape in the country with risk governance, systems and organisational capability being enhanced in tandem with a more competitive market.
   We would like to see a proliferation of more affordable and accessible products that leverage on new technologies and the high levels of connectivity in Malaysia. This will benefit the population as a whole and will be particularly helpful to segments that are currently underserved. 
   The protection gap is still significant, estimated at MYR553,000 per family, according to a 2012 study by the Life Insurance Association of Malaysia and Universiti Kebangsaan Malaysia. Another study by the Malaysian Takaful Association in 2014 found that those with monthly incomes under MYR1,000 have a protection gap of 17.5 times of annual income. In aggregate, only 35% of the adult population have at least one life insurance or family takaful policy. This situation needs to be addressed urgently. 
   While the Bank has continued to invest in financial education, great strides in insurance penetration can only be achieved when a positive customer experience becomes the norm. This is something that only the industry can deliver. 
   To continue meeting the needs of businesses moving up the value chain, the insurance and takaful sector must be able to develop internal capacity for offering specialist risk products. This will require continued investments in talent development, especially in underwriting for such specialist risks. With a healthy flow of graduates from actuarial, IT and other sciences coming into the market every year, there is every opportunity for the industry to grow a strong and sustainable talent pipeline. 
Q: How is the market responding to the latest phase of motor insurance liberalisation, where individual insurers can now determine pricing based on broader risk factors?
With ongoing communication by the Bank and the insurance and takaful industry, consumers are increasingly aware of the objectives and benefits of motor insurance detarrification. In particular, that it leads to more equitable premiums through differentiation of good and bad risks. This is also expected to drive safer driving behaviour, which will have broad public support.
   To date, there appears to be a reasonable dispersion of premium adjustments within a moderate band, suggesting that insurers are starting to differentiate between lower and higher risks. A wider set of risk factors are now being taken into consideration in setting premiums, including security features in the vehicle, driving experience and behaviour and duration the vehicle is on the road. The factors that drive pricing will vary between insurers.
   A wider range of products is now offered by insurers to suit different needs. The market has also recently seen the introduction of telematics, which holds significant promise to transform how motor insurance is consumed and can accelerate the desired benefits mentioned earlier. 
Q: While comprehensive motor and 3rd-party fire and theft covers have been liberalised, motor 3rd-party remains subject to tariff. Are there plans to loosen the reins on this type of cover as well? 
The next phase will follow from a review in 2019 on the readiness of the market for further liberalisation. This will be guided by the findings from the two-year period of the liberalised comprehensive motor business.
Q: How has the market progressed in adapting to the three pillars relating to the implementation of the LIFE framework, which began in December 2015?
All insurers and takaful operators are now offering term products through direct channels, in line with the Bank’s requirements published earlier this year. In addition to expanding the delivery channels, consumers can also benefit from simpler and more cost efficient products that are offered in a non-advisory setting. 
The other significant measure is the introduction of the balanced scorecard, which will raise the professionalism of the agency, bancassurance and financial advisory channels. The industry has worked hard to get details right on the balanced scorecard, taking into account implementation considerations, and we expect that the parameters will be published soon.
Details are also being finalised for the minimum allocation ratio (MAR) for the investment-linked business. 
Q: How has BNM worked to ensure the local market is not left behind in the digital and innovation race? How is the industry faring in the era of disruptive innovation?
With its diversity and high levels of connectivity, Malaysia is an attractive market to launch or scale up new innovations. The experience gained here will also be especially useful for businesses with plans to expand into the region. Thus, we believe that we are just scratching the surface of the potential in this market for digital insurance. 
   To seize this opportunity, we hope to see more intentional moves by insurers to incorporate new technology into all aspects of their business. This requires a willingness to invest for the longer term and working together with various service providers and technology firms. 
   As a catalyst for innovation, the Bank established the Regulatory Sandbox for InsurTech companies to pilot new technologies and business models. Flexibilities accorded under the Regulatory Sandbox enables innovations to be brought to market, while maintaining important consumer protection safeguards. We will also be developing forums for InsurTech firms in the market to network and build a diverse community of startups and incumbents with a common goal to advance the insurance sector. 
Q: Are there any new regulations/initiatives in the pipeline? What are BNM’s key priorities going forward and in 2018?
Addressing the protection gap continues to be a focus area. The Bank will be working with the industry and the public sector to bring to the market products and services that increase the affordability and accessibility of insurance.
   With the insurance business continuing to evolve, it is imperative that the regulatory framework remains up-to-date to facilitate the types of innovation that we would like to see in our market. With experience gained from the Regulatory Sandbox, and engagements with the industry and various stakeholders, further refinements will be introduced to better reflect aspects of proportionality and fit-for-purpose. For example, the Bank is developing policy measures that are more specific for digital insurance and platforms. 
   We will also begin to strengthen the market infrastructure surrounding motor claims for more efficient and effective end-to-end claims settlement. This will contribute towards mitigating insurance fraud and abuse. This is an important element in raising the level and quality of service of insurers and promoting their long-term sustainability. A 
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