Jessica Chew Cheng Lian: Distribution in a liberalised environment Keynote address by Ms Jessica Chew Cheng Lian, Assistant Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the General Insurance Agents Convention “Distribution in a Liberalised Environment”, Kuala Lumpur, 5 August 2016. *  *  *  The profound impact of financial technology on the provision of financial services – including insurance – is set to gain more traction in Malaysia. Just last week, Bank Negara Malaysia issued a discussion paper which outlines the conditions for companies to test financial technology (also known as “fintech”) innovations in a safe environment. This responds to the innovations that we have seen emerge in the financial services industry; many of them tapping into opportunities now made possible by technology to enhance the customer experience, improve risk management and lower the costs of providing financial services. The insurance industry itself has just entered the first phase in the progressive liberalization of the motor and fire insurance tariffs which began on 1 July this year. After over 30 years during which more than 60% of the general insurance market has been regulated under tariffs, this is arguably the most significant reform of the general insurance market in decades. The implications of the reform are much wider than just an adjustment to premium levels. It will pave the way for a new wave of product innovation, significantly expanding choices for consumers.
In the absence of a credible nominal anchor in the economy, e.g. in the form of an inflation target, demand increases further. This in turn leads to a tendency on the part of firms to raise their prices, particularly in a situation where production is constrained by bottlenecks. In addition, employees will demand higher wages, and the combined effect will be to create a spiral with rising inflationary pressure, such as we experienced, for example, in the 1980s. Adjustments towards a higher price level can occur over an extended period but will gradually set in motion processes that put a brake on growth. This is a manifestation of the established theory that it is not possible to raise the long-run productive capacity of the economy with short-term stimulation policies. What happens in this scenario if the central bank has an inflation target? When inflationary pressure in the economy increases, the central bank will tighten monetary policy so as to prevent the inflation target from being exceeded. Such a course of events would result in an unfavourable policy mix. The stimulation provided by fiscal policy would be counteracted by the monetary policy, which would mean that even the positive short-term effects of the stimulation would decrease or even become negative. Moreover, if the stimulation provided by fiscal policy is very powerful, this could lead to expectations of an increased risk that the inflation target cannot be upheld, which would then lead to rising inflation expectations and higher risk premiums on Swedish interest-bearing papers.