Motor de-tariffication: challenges and opportunities during periods of change

Motor insurance offerings across Asia are dependent on the individual market. Laurel Hu, Swiss Re's Senior Casualty Treaty Underwriter based in Beijing, explores how you and your team can leverage these challenges and opportunities to find the best approach for your business – and policyholders.

While motor insurance is largely accepted and sold all over Asia, there are still countries that are highly regulated, with uniform policy wording and tariffed rate tables. Tariff rates usually have a limited number of risk classification factors, and companies are not allowed to adjust prices or use additional rating factors.

In the initial stages, tariffs may benefit the industry, but in the long run they can have negative consequences for the industry and the economy. Tariff rates tend to respond to underwriting results more slowly, which may result in difficulties for sectors with worse performance in finding coverage when the loss ratio is deteriorating rapidly. Another example occurs when insurance companies cannot charge adequately according to underlying exposure: this creates a subsidy between good and bad risks. The subsidy usually triggers adverse selection from clients, which will encourage good risks to purchase less insurance coverage than bad risks, further worsening the overall results.

With the changing economy and the development of the motor insurance market, we have seen countries with tariff motor rates starting to consider changing to a de-tariff approach with a certain level of regulatory control. For example, regulators in China, Malaysia, and Thailand have already mentioned plans for a certain level of motor de-tariffication by 2015 and 2016 respectively.

Experiences from de-tariffed markets have shown that there will be certain challenges during this transitional period for the industry, but that there will also be unique opportunities. Companies with a clear vision and strategy in place may gain advantages during this change.

One challenge for small- to medium-sized insurance companies is that they may have less information compared with their larger competitors. Such an informational disadvantage may cause them to face business growth challenges and anti-selection in periods of change.

How can small- to medium- sized companies meet these challenges?

We suggest that companies should be well aware of the regulatory framework and choose the approaches that best fit their strengths. If, in an environment, regulatory flexibility is low (i.e. it takes long time to get rate structure changes approved) and there is a certain transparency of exposure and loss experience in the market, companies should use the industrial data according to their cost structure and portfolio composition. With the gradual adoption of adjustments, small- to medium-sized companies can achieve the necessary change with minimum impact on business and the period of anti-selection. Conversely, when the regulatory environment regarding tariff adjustments is very flexible, being the fast mover can be a reasonable and relatively proactive option. In this approach, small to medium companies can make assumptions about loss costs first through reasonable judgmental selections, then they can quickly recalibrate over time with the help of observed experiences.

For big players, the information asymmetry may create a different problem. We have seen examples in other markets when a new risk classification was introduced by a leading company, with the change causing other players to follow immediately and at the same time loosely manage their distribution channels. The result was that the overall premium adequacy level dropped substantially and hurt the whole industry, including the big player, in the subsequent few years. Companies need to estimate how the marketplace and the regulator will react to a new rate structure and wisely manage different channels to reach an overall positive result during times of change.

In all difficult situations, companies should focus on improving their data quality, operational efficiency and analytical skills. The motor insurance rate structure and price should ultimately better reflect the real underlying exposures, and the market can benefit from de-tariffication.

Published November 2013


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