Malaysia: Driving up motor insurance

Malaysia’s automotive insurance sector has seen several important improvements in the past few months, with the industry’s regulator issuing a series of directives designed to strengthen policyholder protection, rationalise costs and speed claims processing. The industry has generally welcomed these changes, though some experts have suggested that full compliance could be hard to achieve.

On August 1, Bank Negara Malaysia (BNM), the country’s central bank and regulator of Malaysia’s financial services and insurance sectors, announced that conventional insurers and takaful (Islamic insurance) agents must now advise customers on a vehicle’s appropriate market value when consumers are buying comprehensive insurance for a private car. These measures are intended to prevent vehicle over- or under-insuring, a practice the bank said could cause consumers to pay higher than necessary premiums or, after filing a claim, receive compensations that are too low.

“[Agents] are required to advise consumers on the present market value of the private car, the importance of insuring the motor vehicle at the appropriate market value and the effect of over-insurance and under-insurance when a claim is made,” the BNM said. “The measure aims to eliminate situations in which consumers pay higher than the necessary premium or receive lower compensation following a claim.”

Insurers will use Insurance Services Malaysia’s (ISM’s) automobile business intelligence system, or another credible vehicle valuation database, and must indicate the vehicle’s market value in the renewal notice or product disclosure sheet issued to existing or potential policyholders. By setting the insured vehicle’s correct market value, not only will over- or under-insuring practices be eliminated, but the new regulation should also help ensure objective determinations of vehicle market value for both purchasing motor insurance and for claims settlements, according to the BNM.

“This complements existing measures that promote the fair treatment of consumers, including requirements for insurers and their agents to explain the main features of a motor policy, including the type of cover, scope of cover and exclusions, contractual rights and obligations of consumers, as well as claims procedures,” the bank said.

Muhammad Shaani Abdullah, the secretary-general of the Federation of Malaysian Consumers Associations, said the BNM’s decision was a positive move, but the regulations must be strictly enforced or non-compliance will defeat the point of the exercise.

“Agents in some cases tend to manipulate and hike up premiums for motor policies and this does not reflect the true value of motor vehicles,” he told the Malaysia Star in mid-August. “There should be a consistent database made available to consumers to access the value of their motor vehicles and whatever charges involved should be borne by insurance companies.”

Though also backing the new requirements, Lim Chia Fook, the executive director of the General Insurance Association of Malaysia, said any market valuation registry should be publicly accessible so car owners can assess and verify its credibility.

“Having a vehicle market value reference is a good start,” he told local media in mid-August. “However, the public needs to be mindful of the constraints and limitations of any valuation system. The valuations provided are based on publicly-available information of vehicle values from various sources, including classified advertisements [and] inputs from used-car dealers, and then aggregated, resulting in the valuation as a reference figure.”

Another challenge is that the ISM database only includes private passenger cars and excludes commercial vehicles and motorcycles. Experts say this issue must be addressed, since commercial vehicles and motorcycles represent a large proportion of Malaysia’s traffic.

The new measures follow steps begun by the BNM in mid-March when it announced a two-pronged strategy to improve the sector’s efficiency, focused on ensuring affordable motor insurance and speeding up claims payments.

To achieve affordable insurance, the BNM said that, beginning in January 2012, motor vehicle insurance premiums would gradually increase. However, for some vehicle categories, there would be payment reductions or lower levels of increases for drivers with no record of claims. The bank also said measures to help vehicle owners involved in an incident requiring a claim would include establishing a nationwide 24-hour call centre for immediate roadside assistance, facilitating early and simpler claims notification, and reducing the time required to produce police and medical reports.

“These enhancements will significantly reduce the average claims settlement period from the present one to five years to between six and 18 months,” the bank said.

Significantly, the incremental premium increases will also encourage more of Malaysia’s insurers to write automotive policies. With compulsory third-party premium rates unchanged since 1978, many companies have left the market’s vehicle segment, finding it less profitable than other areas. According to central bank data, the motor insurance segment lost RM650m ($217.7m) in 2009-10.

By gradually raising premiums, more firms will offer services, while the new measures should also improve the industry’s operating environment. While policyholders may be paying marginally more for basic insurance needs, this should be counterbalanced by a better, stronger and more responsive industry.

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