Will digital insurance and takaful operators close Malaysia’s protection gap?

In brief:

• 30 million Malaysians remain underinsured and more than 85% of small and medium businesses have inadequate coverage.
• Digital Insurance and Takaful Operator (DITO) licenses offer Malaysia a generational opportunity to change this trajectory.
• To drive transformation, DITOs must look beyond traditional notions of the underserved and unserved and use transformative technologies and data.

The fundamental premise of insurance is to protect people and companies when the unexpected happens. Yet, for centuries, insurance companies have decided whether and how to insure their customers based on risk perception. Underwriters are trained and are skilled at selecting “good” risks that enable their organizations to make money. But this could effectively exclude the people most in need of insurance.
In Malaysia, the traditional insurance construct has resulted in 90% of the population being underinsured. In 2020, more than 85% of small and medium enterprises (SME) also had inadequate coverage, leaving them exposed to business interruption and property damage.1

A generational opportunity for the entire ecosystem
For both existing and new players, this represents significant opportunities to deliver inclusive insurance to Malaysians:   

Incumbent insurers – Incumbents have a prime opportunity to acquire a complementary license and explore disruptive value propositions with ecosystem partners. The boldest will look to create a new brand, with separate operations and a purpose-built technology stack. Others may partner with FinTechs to apply for a license. Those who decide to stay out of the application process will still need to rethink their business models to thrive in Malaysia’s emerging digital insurance landscape. The blueprint developed by the Bank Negara Malaysia (BNM) advocates the use of data analytics, telematics and other digital tools to provide improved risk assessment, underwriting and claims processes, as well as developing personalized products with stronger cybersecurity measures.3 To compete, incumbents must accelerate their digitalization programs. This will include adopting new business models, such as embedded insurance, harnessing data-driven underwriting models, partnering with eco-system players and deploying technologies to deliver personalized capabilities at lower costs.

InsurTech and FinTech – This is the chance Malaysia’s InsurTech and FinTech sectors have been waiting for. A license will grant nimble start-ups permission to open up new markets and create opportunities for expansion across the insurance value chain. BNM sandbox constituents, especially will be incentivized to seek a full license and unleash creativity and innovation into a previously staid market. 

Conglomerates – For Malaysia's largest conglomerates, with diversified interests, a DITO license will both provide a direct stake in financial services and enhance their existing businesses. Insurance is a complementary offering for a host of products and services, including retail, property, automotive and tourism.

Ecosystem providers – Malaysia’s rapidly growing eCommerce market has spawned a raft of platforms that are aggressively growing their distribution channels. A DITO license will unlock their access to customers and data, superior technology and end-to-end capabilities for many of these players.
 

What will a great application look like?
DITO applicants are expected to develop new digital value propositions leveraging embedded insurance and risk sharing models. As they define their target customer segments, DITOs should look beyond pre-conceived notions of the unserved and underserved. Regardless of the segments they are targeting, DITO value propositions should focus on delivering highly differentiated customer experience and deploying disruptive technologies. This is likely to include:

• Offering personalized portfolios based on customer analytics
• Using artificial intelligence (AI) to provide automated advice and quotations
• Leveraging smart devices or applications, such as Fitbits,SmartDrive etc to support better risk prediction
• Harnessing big data to identify risks and opportunities and support more strategic decision- making
• Applicants will also need to demonstrate robust risk and compliance models to support rigorous governance, automated reporting and accurate capital adequacy ratio projections. DITO architecture must be designed with security, technology risk compliance and resiliency compliance in mind.