KUALA LUMPUR (March 29): The ongoing phased liberalisation of motor and fire tariffs may weigh on the performance of some general insurance and takaful operators (ITOs) in the short term, given higher competition for market share, according to Bank Negara Malaysia (BNM). 

In the longer term, however, premium adjustments commensurate with the risk of each segment will support risk-based pricing consistent with a more sustainable business model and safe driving efforts. This, in turn, is necessary to sustain the continued provision of insurance coverage by the private sector, the central bank said.

“The bank will continue to monitor developments in rate adjustments to ensure that any adjustments (upwards or downwards) do not create market dislocations that could affect access to coverage or disproportionately impact segments of the insured population. 

“In addition, the increasing severity and frequency of flood-related claims underscore the susceptibility of general ITOs’ profitability to climate-related risks,” said BNM in its Financial Stability Review report for the second half of 2022. 

As demand for insurance protection is anticipated to rise, a more robust approach to managing climate-related risks will be crucial to ensure that ITOs are adequately resilient to potential downside risks, the central bank stated. 

To date, 80% ITOs have entered the next phase of liberalisation of motor and fire tariffs, having met the requisite prudential and market conduct conditions, and committed to plans to digitalise their motor claims process. 

ITOs have been observed to use the pricing flexibility accorded by the liberalisation to better capture the underlying risks within their product segments, and improve product offerings with new and more innovative design features. 

“Looking ahead, ITOs will remain susceptible to heightened financial market volatility, given their sizeable bond and equity investments. The upwards reversion of medical claims to their long-term trends will also have some impact on profitability in 2023, as mobility continues to normalise. 

“Over the longer term, the impact of Covid-19 variants on premium growth and profitability remains to be seen, as higher awareness can lead to both higher demand for insurance and higher related claims,” said BNM. 

Don't miss the other highlights of the BNM Annual Report 2022. Read the articles here.