Jessica Chew Cheng Lian: Distribution in a liberalised environment
Keynote address by Ms Jessica Chew Cheng Lian, Assistant Governor of the Central Bank
of Malaysia (Bank Negara Malaysia), at the General Insurance Agents Convention
"Distribution in a Liberalised Environment", Kuala Lumpur, 5 August 2016.
* * *
The profound impact of financial technology on the provision of financial services - including
insurance - is set to gain more traction in Malaysia. Just last week, Bank Negara Malaysia
issued a discussion paper which outlines the conditions for companies to test financial
technology (also known as "fintech") innovations in a safe environment. This responds to the
innovations that we have seen emerge in the financial services industry; many of them
tapping into opportunities now made possible by technology to enhance the customer
experience, improve risk management and lower the costs of providing financial services.
The insurance industry itself has just entered the first phase in the progressive liberalization
of the motor and fire insurance tariffs which began on 1 July this year. After over 30 years
during which more than 60% of the general insurance market has been regulated under
tariffs, this is arguably the most significant reform of the general insurance market in
decades. The implications of the reform are much wider than just an adjustment to premium
levels. It will pave the way for a new wave of product innovation, significantly expanding
choices for consumers. It will improve incentives for safe driving behaviours and better risk
management practices by both risk owners and insurers. And it will address market
distortions which have threatened access to motor insurance, particularly for higher risks.
This is also a time when businesses and households are facing rising costs and more
uncertain conditions which can adversely affect discretionary spending on insurance. At the
same time, the exposures of households and businesses which insurance is designed to
protect, have actually increased as evidenced by more frequent and severe incidents of
natural and man-made disasters.
All of these developments raise critical questions for insurance agents. One question that
comes up time and again is: Will insurance agents continue to be relevant? If you are in this
room today, then I assume you will agree with me that the answer is clearly 'yes'. But I
believe you are also here because there is a recognition that agents will have to evolve.
Even if some of you were not completely convinced of this before, that reality surely can no
longer be ignored or dismissed. So the more important question then is how agents can be a
meaningful part of this change in order to advance the important benefits of insurance for the
economy and the wider society?
Today in Malaysia, the general insurance penetration level measured in terms of premiums
as a share of GDP stands at less than 2% (1.68% as at end 2015). In comparison, premiums
as a share of GDP are about 3 to 4% in more developed markets. There is reason to believe
that the extent of underinsurance is widening given the growth in economic activity and
higher risk exposures. As an example, during the December 2014 flooding in the east coast
of Malaysia, total economic losses were RM2.6 billion while insured losses paid nationwide
as at end-2015 was close to RM100 million, which is only a fraction of total economic losses.
Some of the more important reasons for underinsurance include a lack of risk awareness and
the lack of affordable products particularly for low income groups. Another important reason,
and one that the Bank has also observed more widely in our work on market conduct issues,
is a lack of trust in insurance providers and intermediaries. For most people, any insurance
that they buy, with the exception of required insurance coverage for regulatory or financing
purposes, would have been on the recommendation of an agent, broker or financial adviser.
Yet, the same people who have purchased insurance products on the advice of their agents
or advisers rarely express confidence that they really understand what they have purchased,
if it was suitable for their circumstances, or even if it was the right amount of insurance. If
their experience with insurance providers or intermediaries later disappoints, particularly
when they are trying to make a claim, their trust in the industry at large quickly erodes.
Ultimately, the most important measure of success for the reforms that we are now pursuing
in the general insurance industry will be how far they contribute towards addressing the
protection gap that exists, in turn strengthening our foundations for growth and stability.
Today, I would like to talk about how agents have a key role in this process.
In a more liberalised environment, insurers will have much greater flexibility in the design and
pricing of products based on their respective business and risk strategies. This should
encourage pricing that is more aligned to risks (let's call this point "A"), and place greater
power in the hands of consumers to manage the cost of insurance by controlling the risk
factors that influence pricing (let's call this point "B"). This in turn can make insurance more
affordable for more people and businesses, especially small businesses.
However, interventions by an agent are what effectively connects points "A" and "B". In a
detariffed environment, the number and range of risk factors that determine insurance prices
are expected to expand. Consumers will also have more choice on the scope and level of
protection that they purchase. Agents, having both direct access to consumers, and intimate
knowledge of an insurance provider's underwriting considerations and products, are best
placed to explain the insurance options that are available to the consumer and make
recommendations on how to maximize the value of a purchase.
A number of things will need to happen for agents to deliver on this expectation. First, agents
will need to build their capacity to analyse consumer needs and risk profiles, and be able to
match them efficiently to suitable products or combinations of products that are appropriate
to the consumer. In practical terms, this has significant implications for the information
systems that agencies need to develop and maintain, the training, development and
recruitment programs that they have in place, and the kind of information and support that
they need to secure from insurers to enable them to properly advise consumers.
The role of agents is especially important for an orderly transition to a more liberalized
environment. A deeper understanding of risks developed by agents can help address
information gaps in the earlier stages of transition and prevent premiums from over or
undershooting their technical levels. This in turn will reduce future volatility in premiums which is
important to build confidence in the ability of insurers to meet their promises as expected.
Consumers should also be informed that in the first year of transition, they can continue to
maintain the same motor insurance coverage at prevailing tariff-rates. This is to provide an
opportunity for the public to familiarize themselves with new product options that will become
available - a process that agents will play a key role in helping with.
Second, agents need to be able to provide higher and more unique value in their services,
and they need to be able to do this in a highly flexible way. Going forward, insurers are
expected to leverage more extensively on direct channels to distribute their products and
communicate with customers. With digitisation and other new technologies, not just in
insurance but across all other financial and non-financial services, the costs of distribution
and managing customer relationships can be greatly reduced with expanded reach.
Digitisation is also expected to give rise to new entrants into the insurance value-chain such
as product aggregators, which will allow consumers to easily compare product features,
providers, coverage and price. These developments will drive the increasing adoption of
multi-channel distribution strategies.
The implications for agents will be a greater need to specialise and to be able to do so while
seamlessly integrating with different and more diverse contact points with consumers. This
will require innovative business models as parts of the distribution chain become
commoditised. For example, agents may specialise in more complex product offerings,
provide more tailored advice, improve the customer experience by deploying new
technologies and reaching out to untapped consumer segments. As greater efficiencies drive
down costs, fees and commissions will increasingly be tied to the breadth and depth of
services provided by agents. This in turn will contribute towards lifting productivity and the
value of jobs in the industry, including that of the agency force.
Third, insurance agents will need to embrace a broader role in the education of consumers.
Over the years, Bank Negara Malaysia working together with the insurance associations has
invested significantly in informing the public about insurance through our financial literacy
initiatives. We have come a long way in this process. Today, schoolchildren as young as
10 years of age will already be introduced to insurance through subjects taught in the formal
school curriculum. By 2021, we expect to complete the process of integrating financial
education content in the formal school curriculum at all levels of primary and secondary
education.
We have also continued to expand the ways in which we reach consumers, through different
mediums and leveraging in particular on social media. We have adopted a life cycle
approach to guide education initiatives, so that education content is more targeted and
delivered when consumers are most responsive to receiving information. And we continue to
adapt our education content so that it remains relevant and current to the issues and
experiences that consumers face.
In parallel with these efforts, agents will have a more important role going forward. With
greater proliferation of online avenues for consumers to obtain information, contacts between
agents and consumers are likely to be more targeted and specific in nature. Consumer
needs and appetite for advice will also be greater in a more diverse insurance landscape.
This opens up an enormous opportunity to tap into the potential for the more than
100,000-strong life and general insurance agency force to play a much more active role in
educating consumers on the importance of insurance protection, on how to evaluate their
insurance needs, and on making informed choices about the insurance options available.
It is often joked that an insurance agent can persuade you to buy almost anything. Imagine
what we could achieve by more effectively mobilizing such a powerful persuasive force to
communicate essential and life-changing messages on the importance of insurance. The
ability of agents to distinguish this role from the sales process is also important. This should
be further developed by the representative bodies of agents as part of a professional
commitment of all agents to promote sound financial and risk management.
Finally, agents need to engender the type of trust that is built on a solid track record of quality
professional service that places the long term interests of consumers front and centre. With
more than 39,000 general insurance agents registered with PIAM, agents continue to have
the widest outreach of any distribution channel, accounting for over 63% of general
insurance revenues. With such reach, agents wield significant influence over how people
perceive and experience insurance. This in turn affects not only decisions to purchase
insurance; it can also affect the value that is derived from insurance coverage.
For these reasons, Bank Negara Malaysia places significant importance on the
responsibilities that insurers and agents have to treat customers fairly. Our supervisory
reviews show that while most agents are honest and professional, there continue to be
agents who have knowingly mis-sold products. We have and will continue to take firm actions
against such agents and the insurers which failed to implement adequate controls to prevent
these incidents. The Bank is also developing standards on the fair treatment of consumers to
set out our expectations on fair dealings. This includes an expectation that consumers are
provided with products that perform as insurers and agents have led them to expect, and
services associated with the product meet acceptable standards and are consistent with
specific representations made when the product was sold. We will hold insurers accountable
for ensuring that agents comply with these standards, and we will expect agents to align the
way that they engage with consumers to meet these expectations. For many agents who
have placed the consumer at the heart of their business, this will not have a material effect
on their conduct or business. But for agents that have largely thrived on just closing sales,
this will provide an important catalyst for transforming agents into trusted and dependable
advisers.
Conclusion
Over the next 5 to 10 years, the insurance industry will undergo its most significant
transformation, possibly since the early 1990s when the insurance regulatory system in
Malaysia was overhauled. During this period, the insurance landscape is expected to change
in ways that will have a direct and profound impact on the experience that consumers and
businesses have with insurance. As major intermediaries between insurance providers and
consumers of insurance products and services, how insurance agents think about their
business and interact with their customers can make an important difference in helping
millions of individuals, families and businesses across the country who remain ill-prepared for
losses arising from unforeseen events. Addressing this protection gap is ultimately the goal
that we must all aspire to, to promote a resilient economy and the well-being of our society.