Interview: Kamaludin Ahmad

In what way has the evolving regulatory framework affected the insurance industry?

KAMALUDIN AHMAD: The regulatory agenda is becoming focused on the conduct of business, including early intervention and preventative actions before customers feel any detriment. The approach of the authorities builds upon the Organisation for Economic Cooperation and Development’s concepts of treating customers fairly and enhancing their outcomes. The evolving regulatory framework has thus created more demanding supervisory bodies that will, in effect, have mutual interests in group-wide business operations and decision-making. This would result in additional governance and reporting requirements across group entities.

What challenges are insurance companies expecting to face, given the de-tarrification of the motor and fire segments in Malaysia?

KAMALUDIN: One challenge for small and medium-sized insurance companies is that they may have less information compared to their larger competitors. Such an informational disadvantage may create challenges to business growth and lead to anti-selection during periods of change. These companies should ensue they are well aware of the regulatory framework and choose the approaches that best fit their strengths.

If, in a given environment, regulatory flexibility is low – say it takes long time to get rate structure changes approved and there is a certain transparency of exposure and loss experience in the market – firms should use industrial data to take advantage of their cost structure and portfolio composition. With the gradual adoption of adjustments, small and medium-sized firms can achieve the necessary changes with minimum impact on business and the period of anti-selection. Conversely, when the regulatory environment regarding tariff adjustments is very flexible, being the fast mover can be a reasonable and relatively proactive option. In this approach, small and medium-sized companies can make reasonable assumptions about loss costs first, then quickly recalibrate with smaller iterations over time based on the help of their observed experiences.

For big players, the asymmetry with regards to information is likely to create a different problem. There have been examples in other markets when a new risk classification was introduced by a leading company, with the change causing others to follow immediately and at the same time loosely manage their distribution channels. The result was that the overall premium adequacy level dropped substantially and hurt the whole industry – including the big player, over the next few years. Companies need to estimate how the market and the regulator will react to a new rate structures in order to manage different channels appropriately and reach an overall positive result during times of change.

How are local insurers preparing for liberalisation under ASEAN economic integration?

KAMALUDIN: The industry is poised for the transformation and liberalisation of the market. It is noted that sector players are beginning to strengthen their capital management, expand their knowledge and technical know-how in conventional and insurance) lines, and explore new product innovation and deliverables. As part of the liberalisation process in the region, de-tarrification has been taking place in the country. Business strategies for insurance firms are evolving around risk-based pricing, claim servicing, product innovations and strengthening of delivery mechanisms, in preparation for a de-tariffed and liberalised market. A more liberal market also means more consolidation will take place, especially involving small providers. The risk-based capital requirements will encourage smaller firms to merge with bigger players, as they will potentially have difficulty raising the additional capital necessary alone. Larger and stronger insurers would find it easier to emerge as a regional operator in a single market like the ASEAN Economic Community, either with footprints in select countries, or by cross-border supply of insurance products.