Malaysian insurance reform should help elevate risk management: regulator

The reforms, which include measures to make it easier to buy coverage for large and complex risks from international markets, removal of tariffs starting this summer and new prudential measures, will help build a stronger risk and insurance management community and “elevate” risk management practices, hopes the regulator. This was the optimistic view presented by Puan Jessica Chew Cheng Lian, assistant governor, Bank Negara Malaysia, at a recent business continuity management conference held in Kuala Lumpur. “Significant advancements in risk management practices and financial innovations have substantially broadened the actions that risk managers can take to control risks,” she said at the Integrated Risk Management Approach for Maintaining Resilience & Sustainability conference last Autumn. “For many companies, insurance solutions are no longer viewed as the only, or even the most important, way to reduce risk exposures. The insurance reforms will allow the industry to better respond to changing demand drivers,” she continued. “Importantly, it will also create opportunities to build stronger partnerships between corporate risk managers, insurance companies and insurance brokers in elevating risk management practices more generally,” added the assistant governor.hideIn a refreshing diversion from a regulator’s normal brief, Ms Chew also warned the market not to allow itself to become too risk averse because of the rise of risk management. She said that it is critical to maintain that “delicate balance” between extreme risk aversion and well-reasoned risk taking, which is essential for businesses to grow and prosper and will always involve difficult judgements. “We should be careful to ensure that advancements in risk management practices are serving to sharpen, not blunt, such judgements,” said the regulator. The key, as any good risk manager knows, is to invest in the right people, use quality information and build a solid risk culture. “This requires that investments in people and processes are firmly supported by good information, confidence in a strong risk culture and compelling risk managers, who will ensure that organisations do not become complacent and remain focused on doing their very best to prepare for any possibility,” said Ms Chew. For the regulator, the insurance industry has a central role to play in the advancement of risk management in Malaysia and worldwide. She said the cost associated with negative tail risk events will only escalate as business networks grow in complexity. The use of insurance will therefore continue to be an important way in which companies can reduce this cost by transferring risks to insurers. Insurers, she said, are well placed to assume such risks because of their longstanding history in risk analytics, which enables them to effectively exploit the law of large numbers and benefit from risk pooling. But, said Ms Chew, among emerging economies there remains a sizeable “protection gap” despite the increased frequency and severity of weather-related disasters and other natural catastrophes. In 2014, for example, insured losses in Asia only covered about 10% of total losses incurred as a result of natural and man-made disasters. Combined insurance premiums written from emerging markets accounted for only 18% of global premiums in 2014, against 82% recorded from the advanced economies, she pointed out. “Given the concentration of growth and development in emerging economies, going forward the extent of underinsurance is a concern. In many of these economies, efforts are being aggressively pursued to increase awareness of the importance of insurance protection in helping one manage risks and to develop an effective insurance market to meet these needs,” said Ms Chew. Efforts to tackle this problem are underway in Malaysia as elsewhere in the Association of Southeast Asian Nations (ASEAN) and wider region. Ms Chew said the insurance industry in Malaysia currently stands at a “crossroads” of implementing important reforms being introduced by Bank Negara Malaysia both in the general and life insurance sectors. The objective of the reforms, she said, is to further enhance the competitiveness of the industry, ensure its continued resilience and, critically, encourage greater innovation in solutions offered for households and businesses to better manage risks. The Malaysian insurance reforms, driven by the bank, are designed to help this process in two key ways. First, there is the progressive strengthening of prudential standards that are designed to improve underwriting and risk assessment capabilities within insurance companies. At the same time, they will hopefully substantially strengthen incentives for insurers to differentiate themselves in the market. Second, structural changes are being introduced to reduce market distortions and drive efficiency improvements, such as the removal of tariffs. And, beyond domestic borders, Ms Chew said the bank will also continue to pursue further liberalisation in the cross-border provision of insurance in certain sectors, such as the marine, aviation and goods in international transit sector. This strategy is driven by the regional integration policy pursued by ASEAN and will hopefully both enhance capacity and reduce costs for businesses, said the regulator. “Taken together, the reforms are expected to result in wider product offerings and delivery channels, service quality improvements, greater market transparency and more differentiated pricing that is reflective of risk,” said Ms Chew. “This will help risk managers for whom the decision to purchase insurance is increasingly driven by wider considerations, which go beyond just the intention to transfer risk,” she added. And, as noted above, the reforms will hopefully create a more innovative and collaborative environment in which the market will be able to more effectively respond to the needs of risk and insurance managers. Corporate risk managers, insurance companies and insurance brokers will hopefully be able to work more closely together to elevate risk management practices more generally, said Ms Chew. “This includes a wider role envisaged for the industry in providing risk advice to clients and initiatives to advance the quality and coverage of risk information that is useful to risk managers across a broad spectrum of areas, such as information on hazard exposure, demographic changes and technological risks,” she added.

Malaysian insurance reform should help elevate risk management: regulator

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