July 2017 was an important milestone for the Malaysian motor insurance industry as it moved out of a tariff environment. This was a big step as for over 30 years, the prices of motor insurance products were dictated by Bank Negara Malaysia. Liberalisation of motor insurance or more often known as motor detariffication is changing that.
What is liberalisation of motor insurance?
Before the liberalisation of motor insurance, motor insurance premiums were calculated based on only two main factors: vehicle engine size (cc) and sum insured. The prices were governed by a tariff structure controlled by BNM. However, this is no longer the case with the start of the second phase of the liberalisation of motor insurance on 1 July 2017.
An unfair pricing system in a tariff market:
A tariff market has advantages and disadvantages over the Malaysian consumer. Here are some of the reasons why liberalisation of motor insurance is necessary and is beneficial to the public:
1. Safe drivers vs risky drivers
In a tariff environment (before liberalisation), the premiums did not take into consideration good driving behavior and risk management. This meant that a careful and law abiding driver who has not caused any accident or made any claim against his insurance policy had to pay the same amount as the driver with a car of the same sum insured and engine size, who may have caused numerous counts of accidents and made many claims.
This is further illustrated by the picture below (source: BNM).
2. High-risk vs low-risk of theft vehicle models
Below graph released by the Vehicle Theft Reduction Council Malaysia indicates the top 10 most stolen car models in the country in 2016.
Between 2011 and 2016, the insurance industry paid out over RM2.8 billion in claims for vehicle theft. With insurance premium fixed by the tariff system, insurers could not charge a higher price on car models that are stolen more frequently than other models.
This resulted in two vehicles of the same engine cubic capacity and sum insured being charged the same price for insurance – although one could be prone to theft. Example: Toyota Vellfire vs. Toyata Alphard. Now with the Liberalisation, insurance companies are able to charge a higher insurance premium for Toyota Vellfire and lower for Toyota Alphard.
Low-risk drivers at a disadvantage in a tariff market
Due to the fixed pricing based on tariff as illustrated in the two scenarios above, high-risk drivers pay the same amount in insurance as drivers with low-risk. Furthermore, low-risk car models have the same insurance cost as low-risk cars.
1. Safe drivers pay the same amount for insurance as reckless drivers
2. Low-risk cars pay the same amount for insurance as high-risk cars
This has resulted in a heavy cross-subsidization, where the low-risk drivers had to pay for the damages of the high-risk drivers. In a fair market environment, the person who has a higher risk, should and will pay higher insurance.
Liberalisation of Motor Insurance: Broader risk factors that reward good risk management practices
After the liberalisation of motor insurance, insurance companies and Takaful operators now have the freedom to establish their own methods in calculating premiums for their motor insurance products. Liberalisation of motor insurance introduces a fairer pricing system that rewards policyholders with good risk management.
More than just two factors now determine the price of motor insurance, which assess the risk profile of the policyholders. This is known as risk-based pricing.
Referring to the image below by Bank Negara, the factors in red indicate the two main factors that determined premium in the previous tariff market. Followed by three other factors (in orange) that also influenced the price of motor insurance.
- Loading: Insurance companies can place up to 15% loading on premium for special cases. Common examples are loading for young drivers and the vehicle age.
- NCD: A discount awarded to the policyholder during renewal of motor insurance policy if no claims were made during the previous 12 months of coverage.
Liberalisation of motor insurance introduces new factors that also affect premium. They are the ones in blue in the same image above.
- Vehicle model: Certain vehicle models are prone to theft and are perceived to carry more risk than other models. Therefore, these cars are more expensive to insure.
- Driving experience: A driver with more years of driving experience is considered to be at a lower risk than someone with less experience. Therefore, he pays lower premium.
- Driving behavior: A driver with no record of traffic offences carries lower risk. Therefore, he enjoys a lower premium than a reckless driver with traffic violations.
- Security features: A vehicle with additional safety features installed for extra precautions and safety has a lower risk of theft than those that lack such features. Therefore, the premium for such a car is lower.
With this risk-based pricing system, drivers can expect fairer pricing for their motor insurance. Drivers with good driving behavior and lower risk profiles will enjoy cheaper insurance premiums.
The role of the consumer
With premium now largely dependent upon the risk profile of the policyholder, consumers are now in better control of the price of their motor insurance. The consumers can adopt several steps to control the premium they pay:
1. Ensure the safety and security of their vehicles to avoid theft. Park at a safe spot, install additional safety features such as anti-theft devices and immobilizer.
2. Practise good driving behaviour, avoid committing traffic offences and accidents.
3. Shop around for the best product to suit needs and risk exposure. Compare not only price but also features and scope of protection.
Insurance Agent Directory
To start comparing prices and products, consumers can make use of the online agent directory offered by iBanding to contact insurance and Takaful agents from various insurance companies and Takaful operators.