The Governor of Bank Negara recently gave the Keynote Address at the Malaysian Insurance Summit (MIS) 2017 entitled “Towards Resilience: Are We on the Right Path?”
Whilst there were a number of interesting points and issues brought up, one of the interesting issues was on the Perlindungan Tenang program. This program is designed to reach out to the mass market, in particular 8 million working-age Malaysians and over 700,000 micro enterprises that currently need insurance and takaful protection against key risks. The governor went on to mention that products that meet the three criteria of being: Affordable, Accessible and Easy to understand will carry the Perlindungan Tenang logo and benefit from regulatory flexibilities, co-branding and promotional initiatives.
Affordability is quite subjective but to define it in a form of microinsurance circles: at least 70% of the premium paid by the insured should be for benefits rather than expenses, profits or buildup in reserves. This ensures policyholders will receive value from the policy. Obviously, commissions need to be kept extremely low and processes such as collection of premiums and payout of benefits must be extremely simplified. With the surge in technology, especially online platforms and use of smartphones this simplification and reduction in costs is certainly a possibility. However, the need for little or no commissions will be the challenge. To me the only way to do this is through selling via groups of people who have combined for a common cause, for instance an association of fishermen. This association would know the needs of its members and would already have the trust of the members.
Why would an association be willing to actively sell to its members with little to no commissions? The product would be beneficial to its members. How would they know it is beneficial? Well, the fund built up for its members would belong to them but be managed by the insurer or Takaful operator. A fee of 20% would be taken out for all expenses of running the scheme and the balance would belong to the group to pay out benefits. Any excess would be used to lower premiums in the future, for the use of the association or for the education of children of its members or other benefits. Sounds like Takaful? It isn’t! This is exactly what the startup lemonade.com is doing. The only difference is that with lemonade.com the surplus is given to charity.
This kind of a structure would be affordable as well as accessible to the members of the groups. These 8 million workers mentioned by the Governor work in various industries. It is up to us to design funds for these industry associations for their own benefit. The association would choose coverage relevant to its members, so it naturally would be easy to understand.
The final aspect of this type of plan would be that the group would determine its premium rates. What’s the catch? The benefits are not guaranteed, so if they choose premiums which are too low then benefits will also be low. The operator is simply taking its fee so there is no ‘us versus them’ mentality. With this kind of structure, it would only be fair to have much lower capital (RBC) requirements. This flexibility would be actuarially justified and ensure a reasonable return on capital is achieved with fairly low profits required, win – win for everyone.
The structure described above is called a discretionary mutual and is currently available in several western countries. I believe that this structure can assist the Governor’s desire to increase the penetration rate and show Malaysia as a leader in innovative products.
