The Malaysian motor insurance is regulated by the Road Transport Act, 1987 as amended from
time to time. Part IV of the Act provides that every motorist must at least insure any liability in
respect of the death or bodily injury to a third party caused by the use of motor vehicle. For
insurance purpose, motor vehicles are classified into three categories under the Motor
Tariff— private cars (for social and business purposes), commercial vehicles (including motor
trade, public taxis, hired cars and omnibuses), and motorcycles. The two main types of coverage
available for each group of motor vehicles are the comprehensive and noncomprehensive
which also include the Act, Third Party, and Third Party, Fire and Theft coverages. The
comprehensive coverage covers almost all loss or damage, including third party coverage, loss
or damage to the insured vehicle, medical expenses and personal accident benefits to the
insured in respect of death or injury.
The premium rating of Malaysian motor insurance is governed by a tariff formulated by the
General Insurance Association of Malaysia (PIAM). Generally, the objective of implementing atariff is to ensure that the price competition among insurers will not go below the economic
level.
Hence, premium rating governed by a tariff would ensure that the premium rate charged
should not be lower than that laid down in each rating classes specified in the tariff. In countries
where motor insurance tariff is in operation, premium rating analysis is still essential and
should be carried out by insurers. The goals of premium rating analysis are not only to calculate “fair” premium rates whereby high risk insured should pay higher premium and vice versa, but
also to provide sufficient funds for paying expected losses and expenses, to maintain adequate
margin for adverse deviation, and to produce reasonable return to the insurer. Failure to
achieve these goals may lead to not only adverse selection to insured, but also economic
losses to insurers.
In insurance practice, the premium charged to policyholders comprises two components—
risk premium and related expenses. Since the risk premium should commensurate with the
expected average loss, its basic formula is equivalent to the product of expected claim frequency
and expected claim severity. In both Claim Frequency and Claim Severity models, statistical
procedures are required to classify risks into cross-classified classes which are characterized by
the rating factors. For example, the rating factors for motor insurance may include the driver’s
gender, age and location, or the vehicle’s model, capacity and year. In this study, Claim Frequency
model is used to produce estimates of claim frequency rate for the Malaysian motor insurance
experience. The claim frequency rate is equivalent to claim count per exposure unit and the
exposure is expressed in terms of a car-year unit (see Hossack et al. (1983)).
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