The Practice Note dated 20th June 2017 that contains the Regulator’s latest FAQs was certainly not anything good for the Non Life industry, definitely not when Hari Raya is just around the corner. It has caused significant disruption for the industry, particularly the operational side of the Motor class of business. There are significant tightening on how insurers could disapply the tariff premium, which among the important ones are the stringent control over the manner the +/-10% margin is to be applied (assuming the insurer has not gotten any regulatory approval for its detariff pricing) and significantly limiting insurer’s discretion to vary the premium rates even if the exercise is within the established limit, which is very much skewed towards giving individual policyholder more advantages.
Why this last minute change?
Nobody really knows beside the needs to provide more protection for policyholders and to treat each and everyone fairly, including giving them the better advantages…., which also goes to mean any insurer may allow special premium rates for corporate business but not for any sort of favourable deviation for its directors and shareholders. Then…., it is mind boggling that franchise holders are still accorded with some favourable rate dispensations…., i.e., distribution network seems to be considered a risk factor or grouping, of sort.
Not to be seen as being quarrelsome here, perhaps we outline in simple terms what arose out of the PN and recent BNM – CEO dialogue that the industry could use as a guiding principle in shaping the IT system’s underwriting algorithm and successfully rolling out the detariff implementation promptly. The key here is compliant with the requirements and the spirit of the Phased Liberalisation roadmap.
- The “+/-10% limit” as to how insurer could manourver with their pricing is to be measured from the reference rates per the applicable UW guide as at 30 June 2016.
- The “+/-10% limit” as to how insurer can increase or reduce is tied to the premium that the policyholder has paid in his/her/their last previous policy. If the insurer had waived those loading(s) for any particular policyholder then those loadings cannot be added back before applying the +/-10% (increment or decrease) in the renewal year. In other words, the +/-10% up/down margin is only applicable on the previous or expiring premium rate.
- If the insurer did not in 2016/2017 consistently (i.e., >95%) apply the UW guide when issuing cover then insurer is barred from adding back those previously waived loading including a higher tiered loading or claim-at-fault loading on renewal. We would like to think most insurers do waive loading quite often, thus this >95% consistency requirement…. is unlikely to be fulfilled. If the above was the case then you can have two options….
- All loadings and discounts must not be shown on the renewal notice and policy schedule. They must be shown as a single base premium. One good way of avoiding questioning by policyholders.
- If you had selected Option I, you may likely be confronted with the need to apply this similarly for the new business coming to you. Meaning, you would have to start at bare basic tariff before imposing relevant pricing parameters or loading factors not exceeding 10%. The main reason for this is, the regulator expects the insurer to treat both new and renewal policyholders fairly. You are not expected to quote differently. You would probably find the older cars and lower value vehicles coming into your books very quickly….
- Next headache is the difference in premium printed on renewal notice and that churned out of the system (i.e., usually for reason the system’s new setting was not ready when the renewal notices were printed). The regulator insisted that the applicable premium should be on whichever is the lower basis.
- Next, next headache…. What if you have to operate on a few different point-of-sales platforms? You would have to deal with the many system operatives to ensure consistencies in practices and adoptions. Bearing in mind, time is a constraint.
- The extension coverage (or now more widely termed as Add-ons) is now no longer subject to any controls. Previously we talk about the need to seek the regulator’s approval if such Add-On is being repriced downwards by more than the +/-10% limit. This means the windscreen cover extension may be reduced beyond 10%….
(a) Zeroise all loadings applicable in the underwriting guide and start from the base tariff rate;
(b) Add back with the latest pricing/loading factors as applied in the latest pricing/UW guide and impose on the applicable basic tariff premium….cap with a 10%. If there is a need for reduction/to discount, you can combine this with the factored increases/loadings, if any before capping.
(Adopting this Option means insurer would have to do away with all applicable 30/6/2016’s UW loadings and only applying back a max of 10% increase. Alot of premium expected to be lost! No choice but is the easiest way to full compliance….)
(a) Identify each and every individual policy loading (i.e., actually applied in policy), enable a system-match with the pre 30/6/2016 UW guide’s loading on a whichever the lower basis.;
(b) Firm up the premium rate paid by individual policyholder in the system.
For insurers whom had changed their UW guide after 30/6/2016, this can be abit of a mess.;
(c) Use relevant detariff pricing factors to compute the new premium and enable system-match with the actual expiring premium rate. Basically, this is to cap the difference to within +/-10% limit of what the policyholder had paid last year.
(The advantage here is that you should retain as much loading as possible before the implementing 10% allowable loading. But, you may need to explain your full loading (iro pre 30/6/2016’s UW guide) stance to the regulator in respect of premium computation to new customers, which I think is easier to do so comparing with the substantial premium leakages….)
What about sticking to tariff since system setting is such a difficult task and time is not on our side?
This is perhaps a good move if the insurer has no intention to allow discount on their more profitable risk segments groupings…. but insurer must apply to the regulator for dispensation from detariff. Even if the insurer did manage to obtain such approval, it is likely with condition, i.e., Option I of II….
IMPORTANT REMARK…. the above represents the viewpoints of the writer, which may not be true/practical (depending on individual insurer’s operatives) in totality…. Apply where viable, ignore if not practical.