Many Malaysians are still unaware that come July 2017 when the Detariffication starts, their motor insurance premium will never be the same again. How? Well first let’s try to understand how the current system works, and how it has been working for the past 30 years.
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All this time, motor insurance premium in Malaysia follows a tariff structure and has been controlled by the government, Bank Negara Malaysia to be specific. The method of calculation is based on the 2 main factors, which are:
- Market value of the vehicle
- Vehicle engine capacity in CC
Additionally, there could be other factors that may affect the premium cost, these are:
- Packaging – this includes additional insurance products that the insurance company ‘package’ together with the primary motor policy, such as Personal Accident;
- Loading – this includes all additional costs imposed by the insurance company on certain conditions perceived to carry higher risks, such as vehicle older than 10 years old.
Because the method of calculation is the same across all insurance companies and is according to the vehicle you drive, the premium you pay is similar no matter which insurance company you buy from, with a small difference sometimes. This difference is mainly due to:
- Sum insured – different companies may value vehicle differently
- Packaging – different companies may have different additional products and/ or services packaged in their main motor policy
- Loading – different companies may have different loading conditions
How De-tarification will change things in July 2017
De-tariffication = removing tariff. Bank Negara will no longer control motor insurance premium or the method of its calculation under de-tariffication. This means that insurance companies will be free to use their own methods to calculate premium. Under de-tariffication, insurance companies will implement risk-based pricing method. This means that in determining premium price, insurance companies will be considering several risk factors. They will no longer rely only on your vehicle (I.e. market value and engine capacity) to calculate premium, but also the driver himself. This isn’t a new concept, in fact, it is a normal practice in countries such as the USA, Germany, UK, China and Singapore.
To the consumer, several things can be expected from this change:
- Cheaper insurance – because prices will no longer be similar across insurers, consumer will start to look around for company that can offer cheapest premium. To be competitive, it is expected that insurance companies will start to lower their premium prices.
- New products – it is expected that insurance companies will start to introduce more insurance products to the consumer to be competitive.
- Increased professionalism – in another effort to compete, insurance companies will improve their services offered to the consumer
New premium calculation method – risk-based pricing
To simplify it, premium will now be based on your perceived risk. This means:
The higher risk you carry = the higher your premium price will be.
The lower risk you as the insured is perceived to carry = the lower your premium price will be.
The risk factors include:
- Age of the driver: Younger driver means less driving experience. Therefore they carry a higher risk.
- Gender. Female driver have lower risk as they drive more carefully.
- Occupation/ education. Generally the assumption is that the higher education, better occupation the driver has, the lower are his risks.
- Claims history. If the driver has had claims before, this could mean that his risk is higher.
- Type and make of vehicle. High performance cars, expensive and luxurious cars will have higher premium as their risks are also higher.
- Usage of car. A car used by a mother to send and pick her children from school daily will have lower premium than a car used to commute daily to work in the city.
So what can we do to ensure lower premium?
Here are some good practices to keep your motor insurance premium low:
- Shop around for the best deal – compare prices among insurance companies to find one that offers the best price along with the best products and service. Shopping for best deal doesn’t necessarily mean cheapest deal!
- Secure your car – remember, lower risk, lower premium. So do what you can to secure your car. Make sure that the alarms and auto-locks are working. Install a dash-cam if you can afford one. Always park your car at safe location. This will reduce the risk of your car being stolen or damaged during an attempted theft.
- Think before purchasing a car – before buying a car, check how much will the insurance premium be for the type of car you are considering buying.
- Drive safely! Lower your risk of getting into an accident. When you have no claim history, your premium will be lower.
Read and understand more about de-tariffication and how it will impact you and don’t stop there. Let everyone you know about it. Be a smart consumer, understand how you can prepare yourself for de-tariffication.