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News

16
July
2016
Insurers to benefit from detariffication

PETALING JAYA: MIDF Research believes that the first phase of the motor and fire insurance detariffication is likely to financially benefit insurance players as new products are allowed to be priced at market rates.

“We see the first phase of detariffication as able to encourage the increase in number of new insurance products with the introduction of variation in product features. Insurers can freely tailor their new products and price them according to risk profile and customer preferences.

“Correspondingly, this may result in higher premium income and lower claims ratio, which will be beneficial to insurance companies’ bottom line,” it said in a report on Monday.

Although it is widely expected that the detariffication may literally lead to free competition market and subsequently, price wars for motor and fire tariffs, the research house opined that this will not happen, as pricing of insurance products is still required to fall within the risk-based capital framework issued by Bank Negara Malaysia.

“Thus, it is important for an insurer to invest in technology to build sophisticated pricing mechanisms and to improve its operational capabilities. Those lacking in capital to invest to improve their pricing models are likely to face an adverse impact from under-pricing for risk of insurance policies underwritten.”

It said insurance and takaful markets are adjusting to the changes in the pricing of motor and fire insurance products, which will take place gradually, shifting from a tariff-based pricing to a risk-based pricing methodology.

During the phased liberalisation period, the first phase allows insurers to offer new products/coverage at market rates with effect from July 1, 2016 to June 30, 2017.

“As detariffication will lead to a paradigm shift in insurance business activities, the overall impact to the industry is still too premature to be determined at this stage,” said MIDF Research.

It reiterated its positive recommendation on the sector. Its top pick for the sector remains unchanged, which is Syarikat Takaful Malaysia Bhd and for small cap, it continues to like Tune Protect Group Bhd.

“We advocate investors to hold LPI Capital Bhd as the company still possesses good forward earnings growth potential, inherent underwriting profit and margin quality, and generous dividend payout.”

The aggregate earnings of insurance companies under MIDF Research’s coverage are expected to continue to be bright for the next 12 months.

It also said there is no direct impact from Brexit.

“Insurers and takaful operators do not have a direct exposure in overseas insurance market as these underwriters are not allowed to underwrite insurance and reinsurance policies directly in the EU countries. Thus, there is neither a direct benefit of Britain being part of the EU or a negative impact directly from the divorce of Britain from EU on Malaysia’s insurance industry.”

SOURCE: thesundaily.my