Revamping the insurance landscape | The Star

DIGITAL insurers and takaful operators (DITOs) are one step closer to becoming a reality after Bank Negara Malaysia issued a policy document early last month laying out the licensing and regulatory requirements.

The central bank said that DITOs will observe a foundational phase for between three and seven years to “demonstrate their viability and operational soundness.”

The central bank will accept formal applications from Jan 2, 2025 until Dec 31, 2026. Prior to doing this, applicants should consult Bank Negara and can begin doing so by October.

The move has reignited interest and fuelled speculation within an industry some consider to be relatively dull and lagging behind its peers. Several names are now being bandied about as potential applicants.

Unlike the five digital bank licences that Bank Negara issued in April 2022, there appears to be no limit to the number of DITO licences. Also, DITOs must have a minimum of RM30mil in paid-up capital compared to RM100mil for digital banks.

Industry observers believe those seeking a piece of the digital insurance pie will be the fintechs and insurance technology (InsurTech) companies. The bigger, established conglomerates may also be interested.

Ernst & Young Consulting partners Ravi Kittane and Daniel Lee point out that existing insurance models rely on face-to-face distribution of insurance products, primarily from agents and banks.

“While they will continue to have an important role in the overall insurance ecosystem, there are limitations to their ability to reach all segments.”

They say DITOs can address these issues by fostering competition and innovation, resulting in flexible, affordable, comprehensive insurance plans.

“Specifically, medical insurance faces additional challenges from a combination of factors such as medical inflation, a complex value chain with imbalanced incentives and fraud.

“Innovative DITOs and incumbent carriers have an opportunity to address these issues by adopting new technologies and business models to deliver high-quality medical coverage, focus on prevention and drive supply chain efficiencies.”

In this vein, Kittane and Lee believe that DITOs have the potential to significantly disrupt the insurance industry by offering personalised insurance products at lower costs while enhancing customer experience and efficiency.

Deloitte South-East Asia regulatory and financial risk leader, strategy, risk and transactions Justin Ong says the future of DITOs in Malaysia looks promising, potentially mirroring the success of the digital banking revolution due to several shared factors such as growing customer demand for convenient, digital-first financial services and regulatory support.

“By leveraging insights from the digital banking sector, insurance players in Malaysia are set to introduce innovative solutions that offer more value to consumers.”

PwC Malaysia financial services partner Liew Chi Min says the invitation for DITO licence applications is expected to attract a diverse range of market participants including corporates, investors, tech-savvy startups and the InsurTech players who are currently operating in Bank Negara’s regulatory sandbox.

“The transition from the regulatory sandbox to licensed operations offers several advantages, including regulatory alignment, market validation and enhanced scalability,” says Liew.

A key question now is whether the insurance pie in Malaysia is big enough for so many players.

On the other hand, will there be that many DITO applications?

One industry observer says generally, initial interest has not been as intense for DITOs as it was for digital banks. “Maybe it’s still early days or maybe Bank Negara’s requirements are not that easy to comply with, and many don’t really qualify….”

Insurance demand

The numbers, if they are to be believed, are supportive of DITOs coming into the market.

Malaysia’s life insurance and family takaful penetration rates stood at 54% in 2022 and 19% in 2021 respectively, which leaves quite an untapped portion of the market.

Some of the reasons for this low penetration rate include expensive premiums and citizens’ lack of knowledge and information. Bank Negara had set a target of 75% penetration rate in 2017.

On a global level, reports indicate that the global insurance market is set to grow by about US$1 trillion (RM4.42 trillion) between 2023 and 2028 to reach almost US$10 trillion.

Additionally, by 2029, Asia Pacific is expected to make up around 42% of global insurance premiums, with China having the lion’s share.

The global InsurTech space, meanwhile, is thought to be worth US$7bil and is expected to quadruple by 2029, aided by technology and customer advancement.

In Malaysia, a recent RAM Ratings report forecasts slower growth in both the life and family takaful and non-life sectors in 2024, due to inflationary pressures.

However, the report notes that the sector is well-capitalised to handle some margin compression and potential shocks.

It will definitely be interesting to see what DITOs can do for the Malaysian market when the time comes. As of now, anticipation and excitement are building.

This article first appeared in Star Biz7 weekly edition.