Monday, June 15, 2009

Motor claims a major drag on profits of insurance firms

By Habhajan Singh
Claims for motor insurance were a major drag on the operating profits of general insurance and takaful operators last year, according to an analysis of statistics released by Bank Negara Malaysia (BNM).
For 2008, operating profit of the general insurance and takaful business, which declined by 44.5% to RM0.7 billion, was affected by a higher claims ratio of 84.2%, mainly from due to claims by motor vehicle.
Last year, the claims ratio stood at 79.6%, which meant that for every ringgit of premium collected by these insurers and takaful operators, close to 80 sen went to claims. And the situation is expected to worsen, going by the caution thrown in by the the central bank's Financial Stability and Payment Systems Report 2008 released in March.
The BNM report said claims are expected to intensify due to higher incidences of theft and fraud as well as less regular maintenance. This will certainly put more pressure on providers of motor insurance, many of whom are pulling the plug when it comes to providing third party motor coverage.
"Bodily injury makes about 90% of third party claim. It is increasing, making it very painful for insurers.
"To make matters worse, there are fears that fraud syndicates are reaping big, big money from fraudalent third party bodily injury claims," said Takaful Ikhlas Sdn Bhd president and chief executive officer Datuk Syed Moheeb Syed Kamarulzaman.
Major players in the motor insurance sector include Kurnia Insurance (M) Bhd, Allianz General Insurance Company (Malaysia) Bhd, AmG Insurance Bhd, Tokio Marine Insurans (M) Bhd, Pacific & Orient Insurance Co Bhd, Berjaya Sompo Insurance Bhd and Uni.Asia General Insurance Bhd.
The high claims ratio has seen insurers steering clear from underwriting third party liability coverage, the minumum insurance cover mandated by the Road Transport Act 1987. Besides providing insurance protection against death and injury to third parties (which is provided under the 'Act Only' motor insurance policy), third party motor insurance also provides protection against other legal liabilities such as damage to the property of a third party (usually somebody else's car or motorcycle or a neighbour's gate) and certain specified legal costs.
Under the third party cover, a policyholder may opt to include protection for loss or damage to his own vehicle due to fire or theft only.
"It is the Act claim that is rising, and rising fast," Syed Moheeb said.
For this year, the central bank report released three months ago noted that the Malaysian insurance and takaful sector will also be affected by the potential lower demand for protection and related products in a highly competitive industry.
"In particular, the expected decline in vehicle sales will negatively impact the motor insurance and takaful business which constituted 45% of gross insurance premiums in 2008. Premiums are also likely to be affected due to an increase in surrender rates and lower sums insured as a result of policyholders' efforts to reduce costs during these difficult periods.
"In addition, claims are expected to intensify due to higher incidences of theft and fraud as well as less regular maintenance," the report said.
In the report, the central bank also noted that the insurance and takaful sector, while maintaining a comfortable solvency position, faced challenges in maintaining the growth in premiums and contributions from new businesses, compounded by intense competition in the industry. It said total net premium and contribution income grew by 2.4%, mainly attributed to the expansion in takaful business.
It also noted that demand for general insurance and takaful coverage on motor and marine, aviation and transportation related businesses moderated in tandem with the slower trade activities and a more subdued automotive demand outlook.
It said the gross direct premium and contribution for the general insurance and takaful business registered an increase of 5.5% to RM11.5 billion, driven mainly by the expansion in the fire segment.

(This story appeared in The Malaysian Reserve on June 15, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on insurance & takaful called UNDERWRITER, appearing on alternate Wednesdays)

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