5 minute read 13 Mar 2023

The insurance market will need to reinvent itself as the new DITO license framework tasks applicants to solve long-standing challenges.

Traffic and a monorail car rush through the Bukit Bintang intersection at night in Kuala Lumpur, Malaysia capital city.

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

Ravi Kittane
By Ravi Kittane

Partner, Ernst & Young Consulting Sdn Bhd

Global financial services leader, digital transformation evangelist, human-centric change believer, family man, wildlife traveler and arm-chair sports critic.

5 minute read 13 Mar 2023
Related topics Financial Services Asia-Pacific Insurance
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The insurance market will need to reinvent itself as the new DITO license framework tasks applicants to solve long-standing challenges.

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

Given the SME sector makes up 97.2% of businesses and generates 38% of GDP, Malaysia’s lack of suitable protection plans is a prime source of economic  Vulnerability.2  Even SMEs that have insurance complain of long lead times and complicated claims processing. For example, in agriculture, where farms require disbursement within the same harvest season to remain viable.

Digital licenses specifically designed to address underinsurance

Malaysia’s Ministry of Finance and Bank Negara Malaysia are taking action to address this issue. Mindful that recent digitalization among incumbent insurers has largely not benefited the underserved, Malaysia’s proposed digital insurance license framework is explicitly designed to close the protection gap.

The recently released exposure draft for issuing DITO licenses is making financial resilience a policy priority. Prospective DITOs will be granted lower initial minimum paid-up capital requirements and certain regulatory flexibilities in return for solving the insurance problems faced by millions of Malaysians.

Winning a license will require applicants to demonstrate how they will improve the lives of those most in need by:

  • Enhancing the financial resilience of customers whose protection needs are currently not adequately served
  • Introducing more innovative technology and data-driven solutions to cater to consumers’ diverse protection needs
  • Offering a frictionless consumer experience which is delivered efficiently 

The objective is to deliver inclusive insurance protection, creating a competitive and efficient eco-system to benefit Malaysians. 

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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.

How EY can help

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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. BNM has clearly flagged this by giving examples that include retirees and the unemployed, who need short-term coverage plans for their period of unemployment. Other segments to consider include informal and gig workers, tertiary students, salaried Gen Z workers and homemakers.

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, such as Fitbits, 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. 

Summary

Malaysia is putting in place the progressive regulatory environment required to close its protection gap. Now the market must step up, using transformative technologies to deliver innovative products to different underserved and unserved customer segments.

About this article

Ravi Kittane
By Ravi Kittane

Partner, Ernst & Young Consulting Sdn Bhd

Global financial services leader, digital transformation evangelist, human-centric change believer, family man, wildlife traveler and arm-chair sports critic.

Related topics Financial Services Asia-Pacific Insurance
Upvote