By A. Vishnushama Ambikapathi, Head of Risk Engineering, AXA Affin General Insurance Bhd
For the past 30 years, Fire Insurance industry in Malaysia has been regulated by a tariff; guided by the Fire Tariff document. This guide was then updated in 2007; known as the Revised Fire Tariff (RFT) document, which is being used until now. The RFT states policy wordings, warranties to be applied, and specific base rates according to the construction type, occupation and losses; mainly at that time, to help local insurance companies have a guide in computing premiums and regulating the covers. The tariff environment was established to ensure a fair market among insurers. If appropriately enforced, the risk offer for a single customer shall be similar regardless which insurer they choose.
What is detariffication?
The main reason why tariff was introduced is to help insurers have a sustainable business, by managing competition among insurance companies. However, customers are at a disadvantage from having the same fixed base rate, regardless of their risk quality. As the market for local insurers have matured over the years, it is only fair to have the “open-market” approach initiated. This will favour the customers, where they will have the freedom to choose the insurance company with the best suited coverage.
Detariffication, or liberisation, has been implemented by many developed countries, with the aim to have a more competitive marketplace for the insurers, as well to improve the quality of service with wider range of products for consumers. Singapore is an example of a country within the region that is practising this concept.
The two segments that have been in the tariff environment in Malaysia were the motor and fire segment. Detariffication of both segments was initiated in July 2017, and is continuing to liberalize and mature. Once complete open-market is achieved, insurers will not be bound by RFT, although still governed by Bank Negara Malaysia (BNM) and Persatuan Insurans Am Malaysia (PIAM) to ensure compliance. PIAM will overlook the industry practice to prevent any deviation by insurance companies from allowed boundaries. Ultimately, Malaysia is aimed to achieve detariffication, and not deregulation.
With this, there will be no “one-fits-all” method when it comes to quantifying a risk. A single rating approach may not apply perfectly for all cases. Insurance companies need to find proactive methods to continue being competitive in pricing and product development.
How will detariffication impact fire insurance as a whole?
Come detariffication, the market will indirectly face reduction in prices. Insurers will need to more dynamically manage their premiums and find the fine balance to ensure competitive pricing, as well as to help customers recover from losses. The premiums need to be engineered and calculated with substantial technical data and actuarial formulas.
This is where risk engineers come in. Roles of risk engineers in insurance companies have never been more significant than now. Risk engineers (other common names are loss prevention engineers, risk consultants, loss prevention consultants, risk surveyors) have been trained to be the eyes of the underwriters – they visit the clients’ sites, and produce risk reports for underwriters’ reference.
During the days of tariff, risk engineers were sent to site to gather information, based on a report template. The template usually covers areas purely to satisfy the RFT’s requirements. There is minimal engineering input given to assist underwriters’ decision.
With liberisation, underwriters will a need a holistic opinion on risk quality, in order to evaluate the site better. Risk engineers will need to produce customized reports depending on the occupancies. For example, the items of concern of a fire in a warehouse varies from that of a power plant. Conversely, business interruption exposure for a commercial risk may be different from a manufacturing risk.
With the proper hazard identification of a client, the risk engineer gives risk improvement recommendations to the client to help mitigate the risk. Any reduction in exposure means reduced clients’ business interruption, in case of a loss. This proactive approach will not only benefit insurers, customers have an edge as well.
Furthermore, risk engineers being the front-liners of the company, will need to portray that they are not just at the client’s site for a visit to collect data, but also to help client identify any exposures in their business. Risk engineers’ role will evolve into a consultant, rather than purely a surveyor per se.
Risk engineers would also have an expanded role with customers, by providing value-added services. Post-loss surveys for example – the risk engineer would visit a site which just had a loss incident, and discover avenues for risk improvements. The risk engineer would work together with the customer to mitigate the loss from reoccurring.
Back at the office, there will be more collaboration between risk engineers and underwriters, distribution, and actuarial; to give an impactful analysis of clients’ risk quality and pressing exposures. Risk engineers will also assist in risk accumulation and modelling, natural catastrophe modelling, technical rating, and pricing tool. Risk engineers will aim to help insurance companies to correctly rate a risk. The risk loss data will be substantially helpful, nevertheless risk management will play a pivotal role in underwriting pricing, product, and term setting.
To summarize, risk engineers will help in pushing limits for improving risk qualities in the insurance industry, as well assisting underwriters in providing better coverage for customers. Better risk management not only aids underwriters and the insurance company, they also help customers have an uninterrupted business. As this is a transformation process, risk engineers need to be more open to enhance their role for the dynamic change of the insurance industry, which is evolving into risk-based underwriting.