The FINANCIAL -- Malaysia's hike in the tariff rates on motor insurance provides a small break to providers, but is not a game changer for them, says Fitch Ratings.
The tariff increase is yet another step toward full deregulation by 2016, but it is too small by itself to provide a complete turnaround in profitability for motor insurance.
Motor insurance profitability remains depressed in Malaysia. Increasing accident rates, a higher amount of bodily injury claims, rising medical costs, and fraudulent claims have consistently undermined the loss ratio of the third-party bodily injury and death (TPBID) business in the last few years.
Tariff increases are helpful but have much ground to cover. The regulator has undertaken efforts since 2012 to balance insurance buyers' affordability, with profitable underwriting performance for the insurers. As a result, incremental tariff increases should lower the loss ratio of TPBID activity to an estimated 230% over the near term, from nearly 300% in 2011. But they have much further to go before lowering "combined ratios" (an aggregation of expense ratio and incurred loss ratio) to around 100% - which is the approximate break-even point for TPBID activity, according to Fitch Ratings.
Improvements in the motor insurance business are likely to be much more pronounced once the sector is fully deregulated in 2016. Until such time, the sector should remain unprofitable for many Malaysian general insurers, and the underwriting losses from the motor business are typically cross-subsidised from other more profitable non-motor business lines.
Poor claim results from TPBID will continue to constrain insurers in improving their overall motor portfolio margin, although TPBID insurance only represents about 11% of total motor market premiums. The underwriting margin of non-compulsory motor insurance remains generally healthy, due to a favourable claim ratio and stable commission structure. The combined ratio for total motor business was 105% in 1H13 and 103% in 2012.
The General Insurance Association of Malaysia has announced increases in motor insurance premiums, which takes effect from 15 February. Under this third round of rate adjustment of the New Motor Cover Framework, the third-party cover for motorcycles of 110cc will register a rate increase of around RM1-3.50 per year over the next four years; RM6-34 per year over the same period for private cars of 1400cc, and around RM0.10 per passenger per trip for express buses. These measures accompany the rationalisation of other subsidies from September last year - including fuel and sugar prices, and electricity tariffs, according to Fitch Ratings.