Today is Christmas Eve and I am staring blank into my notebook’s screen….. and I am on leave currently – taking leave from the hustle and bustle of everyday life only to be inspired working on a Christmas-blog! Stucked along the way… I played with some WordPress -related plugins, and discovered “snow storm” by Tribulant.com – you don’t see much of a snow storm anyway but snowflakes coming down this blogsite. Didn’t you see them coming? Supposed this was because the background of the site is of the lighter colours….
Don’t get deviated, the image of the bak kut teh was framed here simply as a replacement for the usual Christmas turkey for the latter is not any part of Malaysian delicacy. And didn’t you see those snowflakes falling into the bak kut teh?
Let’s get back to the main subject…. The Malaysian Motor Insurance Portfolio. The following figures look like the Motor segment of the insurance industry is drifting south: (The loss ratio is computed based on Net Claims Incurred / Earned Premium)
|(Extraction – ISM)||Loss Ratio (%)|
|2010 (6 months)||258.1||58.4||78.8|
The ratios are excluding commission and management expenses – since 2007 the combined loss ratio (including commission and expenses) had escalated above 100%, and 2010 looks like no difference.
Throughout the year 2010, I spent more time hanging out with those motor insurance risk-loss statistical (both company-internal and industry-external) profiles than with the other technical matters, mainly trying to figure out what exactly we can learn from the numerous developments over the last couple of years.
Trying to find a magical formula to make underwriting profits from motor insurance portfolio…. Nothing to hide… this approximately RM6 billion premium segment of the industry is huge and anyone who finds a solution to its predicament finds the goldmine.
Three major things got the industry into trouble….
- the weak state of preparedness in meeting the Risk-based Capital (RBC) framework,
- courts awards for third party bodily injury (or Act) claims are on the uptrend, and
- the motor insurance premiums were written on mass marketing basis.
Making underwriting losses with the Motor portfolio seems to be a norm nowadays. The only saving grace is to take these Cash-before-Cover (CBC) motor transactions and then try making effective investment returns out of them. Hopefully at the end of the day, the ROI is good covering for the losses generated from the motor underwriting activities. However the effectiveness of cash flow underwriting had over the years not been convincing, especially where management expenses had increased against a backdrop of dropping investment returns. “…. the trending is increasing spare parts & labour costs, runaway Act losses and climbing expenses”
We probably by now would have known most of the major issues surrounding those escalating costs, but solution is nevertheless far-fetched. Perhaps for simplistic reasons, we could conceptualise our real problems in the following manner:
- We need enough Non-Act premiums to cover up for the escalating Act losses
- The Act losses from the past underwriting years cannot be supported by the performance of the current year’s portfolio
- The current year’s portfolio must be able to take care of the current and future loss development in respect of its risk – loss profiles
Firstly, the possibilities of future adverse loss development trend must be dealt with, and the better effort would to apply more stringent underwriting process to filter out risks that we do not want – case in point would be those risks that your company could never make any business sense of their persistent losses, example are third party coverage and comprehensive coverage for commercial vehicles, buses and taxis. In this context, it is fair if more detailed analysis are done so that all stakeholders, and this includes the intermediary channels can be kept abreast of the past loss development and how this is already affecting the company. “Statistical discovery of the insurer’s risk-loss profiling patterns creates transparency among all stakeholders, and this is strategic”
Statistical discovery of our internal risk-loss profiles as they had developed over the past years is important for management to make real business sense of the type of risks that we are going to put into our books of business…. or to apply the degree of controls where ever appropriate.
Transparency in this regards says a lot…. which ultimately, it serves towards getting all stakeholders to accept this very simple fact that losses are real and are a threat to its very existence. Transparency is also likely to bring out the best from the people especially the marketers, claims handlers and the underwriting fraternity…. which is tactically good for future transformation plans to work. Transparency among industry practitioners helps bring out the real issues to the table, and this augurs well for the industry as a common platform can evolve therefrom….
The Agency Factors……
Agency has been a driving force behind most insurers’ overall business successes but with more than 90% contribution of the total insurer’s motor portfolio, many agents are finding themselves as liability of sort to their principals. I think agents are very well aware of this and they are trying their best to make things better for both their principals and for themselves. The days of mass marketing (or selling) are slowly shutting its doors – insurers’ marketing force (and likewise the agency channel) must come to terms with motor risks selection.
Insurers would have to “cherry-pick” their risks in order to stay, at least on the break-even level. This means insurers would have to work more efficiently towards achieving the following:
- strengthening their underwriting guide, and
- putting more controlling underwriting metrics within the point-of-sales IT system.
In summary, risks acceptances by agents would be system-controlled in the most rigid of manner and any request for deviation from the prescribed controls would necessarily require some higher authorised personnel to approve. Such special approval may be hard to come by……. soon!
Deductibles, loadings on premiums….. and even outright rejection of older private comprehensive vehicles may become a norm in the days ahead – main objective is to salvage adequate premiums so that on the average, gross premium per policy attained is higher than the total costs of underwriting a policy.
It is also in line with the concept of getting enough Non-Act premium portion to enable covering against the losses enumerating from the Act portion. In this respect, perhaps consider loading the basic Act premium to a level that on the average, the loaded Act premium is able to deal with the Act-related losses. If the Non-Act losses are not a concern, both now and into the future, perhaps there is no necessary to impose any loading. Combining both the loaded Act and basic Non-Act premium would produce a more viable form of minimum premium to be imposed….. and that anything below this minimum premium, the risks may have to be rejected.
Isn’t this something prelude to the coming era of the detarification?
Are we done yet?
Not yet…. what we have discussed above were just for the well-being of the current portfolio and the possibility of the same portfolio developing any adverse loss trend. This cannot solve the problems from the past.…
The past underwriting years would have brought in substantial number of Act-related claims and many remained unresolved – in the past, such claims took an average period of 5 to 6 years for a full settlement. In recent months the period may had reduced a fair bit. But still there are substantial numbers of claims yet to be resolved, and we must have them resolved as soon as possible, otherwise adequate case reserves must be injected to better reflect the likely settlement amount. At least the reserves should be reviewed taking into consideration the following important areas of contention:
- will the case subsequently fought in courts or can this be settled amicably?
- time likely taken for a full settlement and what is the past years average in respect of a claim going to courts?
- there must be a minimum case reserves if a case is likely litigated in courts or a subject of lawyer-to-lawyer negotiation
- case reserves in all respect should be time-driven or time-structured, and insurer must work out this structured case reserves and apply them accordingly if the current reserves is found to be lower….
No wonder whenever any motor-dominant player in the past was hit by some motor reserving problems, they never really recovered…. it was really about the past catching up. The worst thing about such problematic players was that they NEVER actually recovered without any substantial fresh capital injection – Mercantile, Tahan, Peoples and Panglobal are examples….
The Senior Management team of the company should start taking appropriate control of the methodology used in setting initial case reserves and the process within case reserve reviews – reinventing this process is not longer an option, it is a matter for survival…..
Now… ain’t the above the magical formula? And Santa just made this in time for Christmas!
Ho! Ho! Ho! Merry Christmas & Happy New Year……………..