Moving Towards a Deregulated Tariff Environment

1
Moving Towards a Deregulated Tariff Environment

• C. F. Lim
• Persatuan Insurans Am Malaysia
• (General Insurance Association of Malaysia)
• 11th July, 2007

2
Global Competition
Foreign Presence in
ASEAN No of Foreign Market No of Foreign
Market Life Insurers share Non-Life
Insurers share Singapore 7
54.6 30
56.7 Malaysia 5 64.6
10
14.2 Indonesia 36 46.0
79
28.9 Philippines 17 58.7
12
15.0 Thailand 1 48.6
5
8.3 Vietnam 4 3.7
3 n/a
Source Asia Insurance Review
3
ASEAN Insurance in Perspective

• 2005 Life Non-Life Insurance Statistics
• Premium volume US30,405 million (Singapore,
  Malaysia, Thailand, Indonesia, Philippines,
  Vietnam excluding Brunei, Laos, Myanmar and
  Cambodia)
• Global market share 0.88 (in comparison North
  America has 33.4 Europe 37.6 and Japan 13.9)
• Average premium per capita US 402 (cf. US3,875
  US1,514 and US3,747) (Malaysia US283)

4
ASEAN Insurance in Perspective

• 2005 Non-Life Insurance Statistics
• Premium volume US11,220 million (Singapore,
  Malaysia, Thailand, Indonesia, Philippines,
  Vietnam excluding Brunei, Laos, Myanmar and
  Cambodia)
• Global market share 0.78
• Average premium per capita US 92 (Malaysia
  US95)

5
ASEAN Insurance in Perspective

• 2005 Life Insurance Statistics
• Premium volume US19,186 million (Singapore,
  Malaysia, Thailand, Indonesia, Philippines,
  Vietnam excluding Brunei, Laos, Myanmar and
  Cambodia)
• Global market share 0.97
• Average premium per capita US 310 (Malaysia
  US188)

6
ASEAN attractions/distractions

• Tremendous growth potential
• Favourable demographics
• Relatively stable economics
• Rising incomes
• Social security reforms
• Opening of the market
• Rises in premium rates
• Improving human resources competencies/skills,
  corporate governance

7
Attractions of Emerging Markets

• In general, the emerging markets (South and
  East Asia, Latin America, Central and Eastern
  Europe, Middle East, Central Asia and Africa)-
• account for gt 20 of global GDP
• over 85 of the world population
• generate only 12.5 of global total premium
• introduction of obligatory insurance in some
  markets
• market liberalisation will provide powerful boost
  to the insurance industry
• average life insurance penetration only 2.2
• average non-life insurance penetration only 1.4
  (Penetration figures vary widely between markets
  but also hide the fact that some sectors of
  populations have no insurance cover at all.)

8
ASEAN attractions/distractions

• Investment climate improving but volatile in
  some markets
• Changes in supervisory systems e.g. solvency or
  risk-based capital requirements may reveal
  under-capitalised insurers
• Issues of deregulation of insurance tariffs

9
Global Competition

• Global competition is spurred by-
• established industrialised markets looking
  outwards for other opportunities for growth and
  profit
• Emergence of universal financial services
  organizations expanding their operations globally
  
• Entry of non-traditional players

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Global Competition

• It is no longer a question of whether there will
  be Global competition for ASEAN insurers because
  global competition is already here!

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Global Competition

• ASEAN has been and will continue to be a magnet
  for foreign investments because we have the
  potential and opportunities.
• Global players who choose to ignore ASEAN, do so
  at their own peril
• This is reality so instead of resisting we should
  be looking into preparations for more competition
  to come.
• some broad approaches and action plans as put
  forward in the Financial Sector Masterplan
  adopted by the Malaysian Insurance industry in
  2001

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FINANCIAL SECTOR MASTER PLAN TO BE IMPLEMENTED
IN THREE PHASES OVER 10 YEARS
2010 PHASE 3 (after 7 years)
PHASE 2 (3-4 years)
2001 PHASE 1 (3 years)

• Assimilate into global arena
• Introduce new foreign competition

• Intensify competitive pressure in the domestic
  financial sector

• Enhance capacity of domestic institutions to
  compete
• Enhance financial infrastructure

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Insurance Sector Master Plan - Broad approaches
2010
Allow new players greater market access
Gradually promote greater competition within
domestic market
Accelerate deregulation of incumbent players
Strengthen financial resilience, corporate
governance consumer protection mechanisms
2001
Initiate deregulatory measures to build domestic
capabilities
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INSURANCE SECTOR MASTER PLAN ACTION PLANS
PHASE 3 (after 7 years) Stimulating innovation
through progressive liberalisation
PHASE 2 (3-4 years) Promoting consolidation and
strengthening incentives for improved performance
PHASE 1 (3 years) Building the capabilities of
domestic insurers

• With necessary foundation in place to
  progressively liberalise the insurance sector
• Provide consumers with greater access to
  world-class products and services
• Act as powerful catalyst to hasten the
  development of the domestic industry to
  international standards
• Opportunities for entry into the market will be
  made available under this phase

• Establish foundation to support greater role of
  market discipline to complement regulation and
  supervision
• Prepare industry for progressive liberalisation
  in Phase 3
• Strengthen financial resilience of insurers
• Enhance consumer protection
• Domestic industry consolidation
• Convergence of performance standards towards best
  practice and performance benchmarks

• Allow greater operational and management
  flexibility to develop and optimise skills, scale
  and technology
• Deregulatory measures to encourage innovation in
  the market
• Allow access to broader product range to leverage
  on distribution channels and promote increased
  level of competition within the domestic market

15
Deregulation of Tariffs

• General effects of deregulation-
• Competitors begin to reduce the premiums in good
  segments
• Other competitors will follow the reductions in
  order not to lose market share in good segments
• At the same time, premium increases in bad
  segments are ignored
• After a few financial year cycles the results
  of most insurers become very bad cannot support
  the low rates
• Forced to increase their rates
• Cycle is repeated
• Can we avoid the negative aspects of this
  deregulation cycle?

16
Deregulation of Tariffs

• General effects of deregulation-
• New market structures become inevitable e.g.
  innovations in distribution channels and products
• Market operates at lower margins
• Management and acquisition cost controls become
  important factors for survival every saving in
  internal costs will assist in surviving the
  increased competition
• More volatile results
• Exit of less successful insurers
• Alternatively, insurers identify and capitalise
  on niche markets

17
Deregulation of Tariffs

• General effects of deregulation-
• Differentiation of insurers as they compete on-
• SERVICE LEVELS
• TERMS AND CONDITIONS
• PRICING (Importance of data gathering, analyses
  and scientific underwriting cannot be emphasized
  enough)
• Pricing becomes increasingly important
  competitive parameter Consumers benefit due to
  the competition and squeeze on margins
• Market excesses must be balanced by regulatory
  measures risk-based capital, solvency-based
• Insurers will gravitate towards capital
  productivity
• Cyclical stability?

18
Deregulation of Tariffs

• General effects of deregulation-
• Underwriting returns to the market
• Insurers dilemma of pressure on premium levels
  and need to improve products and services
• Pricing of products becomes more detailed and
  sophisticated
• Underwriting parameters/factors increase and
  individual insurers create their own tariff
• Data that is qualitatively and quantitatively
  superior will give insurers an advantage
• There are no bad risks simply risks that are
  badly rated.
• High exposure risks can be underwritten so long
  as the premiums are adequate!
• BUT insurers do not insure for certainties