Count down to motor insurance liberalisation

What is keeping general insurance companies’ management in Malaysia awake at night?

August 2, 2016
| China, India, Malaysia
  • The first steps towards motor insurance liberalisation in Malaysia will be set in motion from July 1, 2017.
  • Two main outcomes of liberalisation that could have a wide ranging impact on the industry are free competition and product differentiation.
  • The early implementation of tools and processes can facilitate informed decision-making and execution of strategies in the organisation.

No longer than a month ago, Bank Negara Malaysia (BNM) issued a concept paper, which outlines the roadmap for a phased liberalisation of Motor and Fire insurance.

Liberalisation is a game-changer for the general insurance industry, and in such an environment competition generally intensifies and margins come under pressure. Companies that are not sufficiently prepared or financially well-equipped may stand to lose more than just a portion of their profits, and in some cases they may end up being taken over by players who are better equipped and in a stronger financial position.

The first steps towards motor insurance liberalisation will be set in motion from July 1, 2017, when the tariff rates for Comprehensive, Third party Fire and Theft products1 will be removed and insurers will be allowed to introduce new products at appropriate premium or takaful contribution rates2. The pricing for new products will no longer be subject to the Tariffs, but can be determined by insurers according to their own risk pricing model, strategy and approach.

From 2019 the progress of liberalisation will be reviewed to assess the impact of these measures and the readiness of consumers and the industry for further liberalisation by BNM.              

Such a phased approach seems to be appropriate for monitoring and mitigating the risks posed by the current stagnant economic conditions in Malaysia –the overall general insurance industry grew at a mere 2.3% in 2015 primarily due to sluggish car sales and little overall economic growth, in addition to of course allowing sufficient time for the customers, intermediaries and insurers to adjust to a more liberal market.

The intended consequences of liberalisation include promoting innovation in product design and distribution channels; enhancing focus on customer engagement and servicing; and increasing insurance penetration to support economic expansion.

General insurance companies’ management need to prioritise the most critical aspects in preparing for liberalisation as they have just over twelve months to prepare.    

At Willis Towers Watson, we have developed a comprehensive framework to assess readiness of companies for impending liberalisation; helping them in developing their strategy and approach, identify and potentially close any capability gaps. So, what is keeping General Insurance companies’ management in Malaysia awake at night? 

Liberalisation will require a transformational change in the operations and business model of insurers.  While the transition is likely to involve significant volatility, as seen in other recently liberalised markets such as China and India; being well-prepared and disciplined will not only help insurers in making informed decisions through the transition period, but also in achieving longer term success.

Managing motor insurance in a liberalised environment

The level of success most companies can achieve in a liberalised market will largely depend on the performance of its motor portfolio, given the importance of this business for the Malaysian General Insurance market.

Two main outcomes of liberalisation that could have a wide ranging impact on the industry are:

  • Free competition – Insurers will be free to design their products and also price them differentially, provided they include the minimum third party cover. 

    Some insurers may intentionally pursue a strategy focussed on increasing their market share in preference to profitable underwriting; or unintentionally end up doing so simply because they haven’t implemented tools and processes to properly select and price risks. This could trigger fierce and unhealthy competition, although robust regulatory frameworks, adequate capital requirements, shareholder expectations around return on capital and lessons learnt from other liberalised markets may act as restraining factors.

  • Product differentiation – With increased competition and pressure on premium rates, insurers are likely to introduce innovative variants of current products to differentiate their offerings.  Expanded choice and increased marketing efforts are expected to drive a change in consumer buying behaviour, encouraging them to shop around.

    Operating in such an environment will require revamping of product, customer and distribution strategies as the ‘one size fits all’ approach will need to be replaced with a more discerning approach. We expect that tailored solutions with specific features for some customer groups, e.g. households or drivers with low mileage.  

The increased freedom in product design from July 2016 will provide opportunities for companies who are willing and able to innovate – and pressure on premium income volumes and profitability for those who are not.

To be successful in a liberalised environment, companies will need to simultaneously focus on the four key areas as indicated below:

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1. Strategic focus

With shifting customer preferences, buying behaviour and increasing competition; companies will need to work on the three important pillars of their strategy – products, customers and distribution.

In this phase, companies will need a robust framework to monitor and assess the actual impact of business strategies deployed in the market and the agility to act and react much more quickly than before.

2. The importance of predictive analytics

Forward-thinking insurers need to be more conscious of the importance of risk segmentation and risk selection and its dependence on augmented data and predictive modelling.

Companies that are not able to produce such insights themselves and instead solely rely on industry data will end up losing the more profitable risks and attracting the less unprofitable ones.

The application of predictive modelling does not necessarily stop at pricing. In most of the mature or maturing markets (Singapore and China in Asia, for example) several of the more forward-looking insurers are already exploring the use of such models in areas such as underwriting, monitoring customer behaviour, cross-selling and up-selling as well as segmentation and fraud detection.

We have seen profitability improvements from the well-managed execution of broad-based predictive analytics. Achieving this requires a strategic view cross-business and an end-to-end analytics execution plan with clear deliverables and milestones. Exclusion of these vital steps will undermine the success of all the downstream activities.

3. Distribution strategy and approach

The role of the distributor will become even more critical, as customers seek advice in navigating through the myriad of product choices. The current concept paper does not deal with the liberalisation of distribution channels, but our experience is that product and distribution often co-evolve, and we would expect that liberalisation of distribution channels is undoubtedly part of a more holistic roadmap that BNM may have in mind.

In Malaysia, agencies (which includes motor dealerships) currently represent the leading distribution channel for motor insurance. Given the influence that they have on their customers, agents can continue to act as the flag bearer in successfully promoting insurance products in a liberalised environment. Agency management strategies and incentives will need to be reviewed and aligned to ensure recognition to the most valuable agents.

However, more ‘provider agnostic’ channels such as broking and open architecture bancassurance could gain share of new business sales in a liberalised environment.

Alternate distribution channels like aggregators, telemarketing or affinity marketing, could also emerge if distributor commission is liberalised as witnessed in China. There, the direct channel recorded significant growth and currently accounts for over one-third of the total gross written premium in China.

4. Process and capability improvements

In a liberalised environment, the agility of an organisation in decision-making and responsiveness to the competitor actions will gain critical importance, especially in the immediate aftermath of liberalisation, where pricing tactics are more critical than pricing strategies.

Companies will therefore benefit from integrating analytics with strategy to create a more factual, data-based and measurable business process and decision-making culture so that they can respond to market developments as an informed participant.

Speed to market and agility to swiftly implement rates are critical success factors in a liberalised market and control of such levers can have a major impact on companies’ profitability.

In addition to being able to optimise product pricing, the optimal use of high end technological tools to improve capabilities and processes can help insurers in further expanding the profit – growth frontier as reflected below.

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Cultural shift

Liberalisation will not only be new for customers and distributors, it will also be the first time for most of the employees, middle management and leadership of insurance companies to experience operating in a more free and more competitive market.

As the focus shifts to attracting and retaining target customers and to achieving profitable growth in a competitive environment, companies will need to build a culture that promotes, among other things, customer centricity, innovation, service excellence, agility and transparency.

This is likely to need concerted efforts in institutionalising cultural change, starting from the top management and through to the front-office.

What is the cost of being prepared and when should I start?

The complete regulatory path to liberalisation may not be entirely paved yet, but the cost of being too late to prepare is clearly high. 

Even where an insurer cannot yet control price or product terms, predictive analytics has proven to be useful in significantly enhancing distribution and customer targeting strategies for new business and renewals.

Companies that pro-actively make use of predictive analytics pre liberalisation will also have an important head start in terms of collecting and understanding their data, which will become a core asset in a liberalised environment.

The early implementation of tools and processes can facilitate informed decision-making and execution of strategies to refine underwriting, distribution, claims management, expertise and knowledge management in the organisation.

There is no question that liberalisation is a significant market shift for insurers. This provides a platform for positive step-change for progressive insurers and will need robust business cases and execution plans for substantial investment in time and money in technology and people development.

The real question General Insurers’ management in Malaysia should be asking is “What is the cost of not being prepared?”

Note: This article was first published in The Insurance Magazine in Malaysia, July-September 2016 issue.

1. Inclusive of optional add-on covers for the product as defined under the Tariffs
2. Whilst for fire business gradual tariff adjustments will be introduced by BNM from July 1, 2017.

About the authors

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Roberto Malattia
General Insurance Consulting
South East Asia

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Rajesh Sabhlok
Insurance Management Consulting
Asia Pacific

Roberto and Rajesh lead the Willis Towers Watson team that assists General Insurance and Takaful companies across South East Asia in preparing for liberalisation.

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