RAM Ratings believes the introduction of digital insurers and takaful operators (DITOs) will help narrow the critical protection gaps in Malaysia. Consistent with the value propositions highlighted in Bank Negara Malaysia’s discussion paper on the licensing framework for DITOs, the unserved/underserved segment will be the strategic priority for prospective digital players.
“For now, we do not see DITOs posing significant competition to incumbents. Some DITOs might eventually make a foray into the latter’s business fields and those with unparalleled business propositions can capture market shares in areas such as motor, fire, and travel insurance,” says Sophia Lee, RAM’s co-head of Financial Institution Ratings.
Incumbents, meanwhile, are prepared to take on the newcomers, having ramped up digitalisation efforts to better futureproof their businesses. In its latest commentary “Digital Insurance and Takaful to Spur Insurance Penetration in Malaysia”, RAM takes the view that incumbents and DITOs will operate in a competitive environment where both will collaborate to boost insurance accessibility in the country.
As part of the global digital phenomena, online insurance is steadily gaining traction worldwide. Virtual underwriters have relied on technology to improve the different aspects of the insurance business from distribution to claims processing, but many are still in the red, partly due to the hefty spending to develop digital capabilities. While automation reduces the need for sales agents and claims adjusters, it is still unclear if digital insurers will be more cost-efficient than incumbents, given the heated competition for talent recruitment to support digital operations.
Locally, BNM actively champions the digital transformation of the financial sector, where licensing DITOs is a key initiative. The regulator expects prospective DITOs to meet the core value propositions of inclusion, competition and efficiency, but has set a lower capital requirement of RM40 mil (traditional insurers: RM100 mil) and will iron out other regulatory flexibilities for these budding companies. Licences will likely be issued in 2023.
Technology is reshaping the business paradigm of the insurance sector in Malaysia. Aggregation platforms have contributed to the growing popularity of online policy subscriptions, particularly for general insurance like motor, fire, and travel policies. Digital channels are also useful in extending affordable life coverage to the unserved/underserved, but hurdles like the poor financial literacy of the target customers might inhibit their effectiveness.
Agents will remain important as many middle to high-income policyholders still value their services and financial planning advice. Technologies can be used to enhance the productivity of agents instead of displacing them. Similarly, digital innovation is helping to fix pain points in the claims process. Complete automation of the payout process will however require time and the commitment of all stakeholders in the claims value chain.
Technology brings much convenience and, simultaneously, new risks which can represent business opportunities for aspiring DITOs. Among others, they can underwrite the risks associated with the burgeoning digital economy which encompasses e-commerce goods delivery, e-hailing, gig workers’ income, electronic devices and cybersecurity. Several new insurance business models have recently made a debut too. For instance, on-demand insurance allows customers to activate coverage via smart devices only when a specific activity is performed, while embedded insurance bundles protection with the goods and services that consumers purchase. These novel business models are possible focus areas for prospective DITOs.
All things considered, while potential DITOs might compete with incumbents at some point, they will certainly complement the latter in boosting insurance penetration in Malaysia.
