TPBID Newco…. Disputing its viability at a recent Market Meeting

TAKE IT AWAY, WHO CARES! BUT LEAVE THE BEER ASIDE!

On the 30th April 2010, the Non-Life insurance industry held its first open-market discussion on the recent proposed national third party bodily & death (TPBID) Newco and its very sketchy operating model. This event was held by PIAM to obtain feedbacks from the members of the senior management of all member companies.

Generally, the main committee (sitting on the panel) are aligned towards the formation of the Newco for TPBID under the scenario (or option) A, but not without having alot of concerns. For better understanding, it is best if the following sites are checked out before proceeding…

  1. Bank Negara’s proposed Newco and the alternate operating scenarios (or options)
  2. New Motor Insurance cover…. taking a glimpse

THE EVENT…. as it had progressed….

Comments from the floor were skeptical of this Newco’s formation. There were just too many concerns and unknowns that the industry would have to go through if it supported this Newco and scenario A. Among the more hard-hitting arguments against the Newco were:

  1. What the industry actually needed is some across-the-board premium increases to add new lease of life to the current system, but the industry had failed to secure just that for the last 20-odd years. This was what created problem. The implementation of the RBC framework further add misery to it. It is just that VERY SIMPLE….. PIAM SHOULD GET THE CENTRAL BANK TO SECURE THOSE INCREASES AS PER THE PREVIOUS REVISED MOTOR UNDERWRITING GUIDE (RMUT) and not trying to be seen supporting this Newco,
  2. If the Newco needs to be set up… it is because the government wishes to dispense its social obligations and responsibilities to its citizen. Thus it is very natural that the government should just take the Newco on a 100% basis without involving the insurance industry in shareholdings,
  3. Some believe that the Central Bank should work with the other critical governmental departments to help improve on the settlement period and also ensure that awards made by courts are in line with the established guidelines as prescribed by the AG Chamber and the limits as set forth in our Civil Laws Act. In this manner the industry can then be more resilient in curbing the rising costs of claims,
  4. If there are losses suffered by the Newco, these would be funded by all the shareholders……. In this manner, all liabilities are to be backed by the assets of the shareholders of the Newco – NOT just limited by their share capital! Members of the floor felt this is just changing the pay-outs from the current left pocket to paying through the right pocket,
  5. There are just too many concerns and uncertainties as to how the Newco scheme is to be worked out – felt more like a fantasy rather than something practical, and,
  6. The VOLUNTARY TOP-UP Liability limit is a sham and it would sort of re-open the floodgates to litigation that we are trying hard to check within the mandatory TPBID proposal. Thus this is counter productive. On the other hand for those who cannot afford to buy the TOP-UP, what would happen to them if the richer third party claimants insisting of suing for a higher compensation….. there would be more poorer folks going bankrupt and this is NOT what Malaysian wants!

If the house is leaking, we should work hard towards repairing it, NOT construct a new house across the street with the same materials taken from the old house!”

THE COFFEE BREAK…..

IT SEEMS, PARTICIPANTS WERE MORE WORRY ABOUT THE INTEGRITY OF PEOPLE BEHIND THE NEWCO! DON'T YOU TRUST OUR GOOD OLD BANK!

During the coffee break after having talked to the participants, it was noticeably most were actually agreeable to the Newco’s set-up but would prefer a different scenario or option other than A and B, which were prescribed by Central Bank. Some felt that a NEW SCENARIO C should be drawn up as a counter-proposal rather than just raising concerns with the Bank. 

The RM2 million Limit factor! Many of the participants felt the limit of RM2 million should not be there, because as consumers, we are equally threatened by such “perceived” low limit! According to some industry TPBI claims handling experts, it is not abnormal having third party claimants going after the negligent party for as high as RM15 million.

Like one of the members of the moderator panel, the Newco can structure an Excess of Loss (XOL) Treaty Protection to deal with claims exceeding RM2 million. An XOL programme with a deductible of RM2 million is NOT going to be very expensive. With the scale of compensation and limits on heads of damages, there should NOT be a limit set for total losses claimable, and even if a limit needs to be applied, we should expect nothing less than RM15 million…..The proposed limit for any TPBID claim at RM2 million is just too low…. Have we forgotten that we are also CONSUMERS?”

BEER-TALK ACROSS THE STREET…..

Discussion continued across the street at COURT YARD…. On the issues of shareholdings, the Takaful Operators will have a real problems figuring out how the heck are they going to comply with their internal Syariah guidelines….. where some of the business may be non-halal! They are NOT able to take any shareholdings in the Newco…. for certain!

Of course, after a few BEERS, people do get more creative and innovative – We can have two separate POOLs within the the Newco – one for all takaful business and the other, solely from the CONVENTIONAL. :….Problems solved!

Now that the reinsurers realised they do have a big business coming up in the Newco…. damned…it! They all disappeared to be back at their office to write their NEXT BIG PROPOSAL to their head office! Well! Who is going to settle the BILL?

ONE FINAL THING….

Not forgetting… whenever the floor speaks, the moderating panel was fast in hammering out this pointer of: “For the past 30 years, the industry did try very hard working towards getting the premium increases and even tried extremely hard in getting the cooperation of governmental departments, including the judiciary in resolving critical processes and removing impediments to achieve prompt decision making…. all these can be concluded as failed! Therefore, the Newco proposal looks more promising now!”

….VOTED as the most effective reply for the day!

The most important reason as to why the Newco proposal sounded promising was the removal of the CANCEROUS portion of the Motor insurance premium, which was never really explained and expounded to the floor… which I would have thought is the most important thing the industry should know about. By “cancerous”, this simply means, the manner the IBNRs are computed for the TPBID long tailed claims had indeed burned holes into our balance sheet and coupled with the manner the internal capital adequacy ratio (ICAR) is being computed within the RBC framework…. the conclusion is SEVERING THIS LONG-TAILED TPBID and have it placed into a Newco is the most sensible thing to do.

Even if the industry did get some increases in premiums, this is not going to be of help in the next two years or so…. and we may have to wait again for 30 years to get another reprieval!

You do NOT agree with me! Shoot me some constructive comments!



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9 comments for “TPBID Newco…. Disputing its viability at a recent Market Meeting

  1. Vietnam Dong
    May 6, 2010 at 18:09

    Goood write up, In vietnam, third party claims are also increasing but our industry is still not doing anything about it yet. We also do not have Risk based capital implementation, thus losses can still be contained.

  2. ong
    May 4, 2010 at 15:39

    BNM has not thought out this proposed scheme carefully!During the meeting with the stakeholders,BNM could not give any specific details.BNM could only say it was a mandatory basic scheme for everyone.We currently already have basic mandatory scheme.Why change it?What has BNM been doing for the past 32 years as the premiums have not been raised?This scheme is another GLC waiting to fail?We have to move away from this Government subsidy mentality!!

    • May 4, 2010 at 23:35

      Firstly, you are correct to say, we already have the mandatory scheme in ACT cover, thus why start another scheme and this time with a Newco as well as limiting TPBID claims to max of RM2 million. As a consumer this is perceived as BAD taste! How can the previous unlimited TPBID liability claim reduced to just RM2 million…. Justification was 90% of such claims do not exceed this limit! Utter rubbish… just what would happen if your claim fall into this 10% category? You cannot sue the negligent party since he or she does not have any other liability cover beyond RM2 million. So you should have gotten a PA earlier! What if you fif not buy any???? This so-called mandatory and voluntary liability cover somehow do not add up logically. W
      Certainly not with this low limit…. as consumer we should have a higher limit, ie, RM25 million perhaps, if at all this needs to be limited.

      Secondly, what have BNM done for the past 32 years? They could have gotten the industry some increase, at least lah! We are all equally guilty also to allow BNM to treat us as small boys and girls….. for just simple endorsement wordings, BNM wanted to have full control and we failed to speak up. Such controls….. which I felt is totally unnecessary. BUT THEN, we all had actually forgotten, in the JPI 26/1996, BNM did allow the industry to load, albeitly, subject to a ceiling. Until now, the industry is still not getting it right – they still did not load for vehicle falling within 10 years to 15 years for comprehensive. I also noticed many members do not even load or load a meagre 5% to 10% for comprehensive covered old vehicles. For commercial vehicles, many do not even load for vehicles aged more than 8 years…. loading merely comes in after age of 12 to 15 years! This is the killer point….. but we did not blame ourselves here, however, decided to blame BNM for not allowing an increase in the premium! Utter rubbish! So do not blame BNM when we cannot put in any coordinated efforts for the betterment of the industry. It is ncessary COMPETITION must destroy some of us…… ONLY THE STRONG AND STRATEGIC SHALL SURVIVE!

      Finally, I can agree with you that the Newco is nothing more than bringing in another problem for the industry…. we can clear this TPBID from our balance sheet ONLY to enter into another stage of destructive force….. set to destroy the non-TPBID segments! If TPBID is taken off, the competitive force would be even more destructive than what we are getting now. I REALLY HOPE THE INDUSTRY SENIORS start reviewing the dynamics behind those competitive force….

      May be force be with the industry!

  3. Anonymous
    May 2, 2010 at 00:30

    Perhaps, people are just worry that the Newco will end up as just another government department or some inefficient GLC! When having some shares in it, it is naturally the insurers are concerned of the uncertainty over future developments.

    • May 2, 2010 at 22:59

      Quite natural for Malaysian though…. we are always fearful of GLC failing – like we cannot explain how POS Malaysia suffered such a huge losses, etc. But then if this Newco is under the supervision of Central Bank, can things be abit better?

      • Anonymous
        May 4, 2010 at 08:56

        Despite all the hype, perhaps setting up of Newco to take over the TPBID may not be a good idea after all. Why? If there is no increase in the tariff Act premium, then we are actually taking in lesser premium – given the fact that we are already loading between 50% to 100% for those vehicles on third party cover currently! Furthermore, for comprehensive cover granted to old vehicles, the industry is already imposing loading bewteen 15% to 35%, within the permitted loading allowed (JPI 26/1996).

        With the Newco, will there be any more loading as per the JPI? If the decision is to load as per the current practice, would such loading be across board (ie. all the other segments are subject to similar loading) or allowing members to load as they deemed fit?

        • May 4, 2010 at 23:08

          You have your points… great point – currently we do load for third party and comprehensive for older vehicles. Once the mandatory TPBI is taken over by the Newco without the loading, it is unlikely the other segment of the cover would be loaded. Reason….. at least from the marketing perspective, the other segments are deemed profitable and lesser long tail in nature. Tendency to load would be gone as we no longer being constrained by the long tail TPBID claims.

          We get a lower industry premium and in no time losses would creep in, and this time hitting into all segments of the motor insurance. Your point did point to some bad dynamics for the insurance industry!

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