While a slowing of economic growth and uncertainty over global market conditions are expected to cool Malaysia’s insurance industry this year, regulatory reforms could drive expansion in the medium term.
Growth in life coverage is likely to be down on the 6.2% increase posted last year despite rising awareness, according to the Life Insurance Association of Malaysia (LIAM).
Gross premiums are expected to climb by 5% in the life segment and between 2% and 3% for general insurance, according to a statement from credit ratings agency RAM Ratings in April.
While short-term revenue flow may lose some momentum, RAM Ratings said the insurance sector’s prospects in the medium to long term were favourable due to a low penetration rate, improved consumer awareness, better product innovation and distribution, and market liberalisation.
Although roughly half of Malaysia’s population had life coverage as of last year, up to 90% are considered to be underinsured, according to a recent study by LIAM.
Malaysia’s insurance industry encourages individuals, especially the breadwinner in a family, to have life insurance coverage equal to 10 times his or her annual salary; however, coverage is often only one to two times an individual’s annual income, according to press reports.
As of 2015, the penetration rate for life insurance and family takaful (Islamic insurance) was 54.9%. However, when measured as the value of premiums relative to GDP, penetration amounted to 3.1%, compared to an OECD average of around 5%.
Malaysia’s Economic Transformation Plan aims to increase the country’s life insurance and takaful penetration rate to 75% of the population by 2020, or 4% of GDP, representing significant growth opportunities for the industry.
Other components of the industry are also set to expand, with regulatory changes expected to increase demand for a range of policy lines, such as automotive and fire.
Malaysia’s central bank, Bank Negara Malaysia (BNM), is finalising reforms to insurance regulations that will remove set tariffs for these segments.
Under the new regime, which will be implemented in phases starting in 2017, policy pricing will be based on risk analysis, including personalised driver and vehicle profiling, rather than set by the regulator.
“We see the first phase of detariffication as able to encourage the increase in number of new insurance products with the introduction of variation in product features,” said a July report by investment holding company Malaysian Industrial Development Finance (MIDF).
“Insurers can freely tailor their new products and price them according to risk profile and customer preferences. Correspondingly, this may result in higher premium income and lower claims ratio, which will be beneficial to insurance companies’ bottom line,” the MIDF report said.
The phased approach is designed to allow time for consumers and industry stakeholders to adjust to the new operating environment, with an assessment of the impact of reforms scheduled for 2019 before full liberalisation takes place.
Though tariffs will be de-regulated, the pricing of products will still have to fall within the risk-based capital framework issued by BNM, with the bank noting the importance of insurers’ investing in pricing mechanisms and improving operational capabilities.
Price competition among insurers could potentially lead to a consolidation of the country’s insurance industry through mergers and acquisitions.
According to BNM data, as of 2015 there were 40 licensed insurers in Malaysia, of which 33 are direct insurers. Out of this number, 10 firms offer life insurance, 19 offer general insurance and four offer both life and general products.
However, local insurer Maybank Ageas, which has signalled its intent to double in size by 2020, has flagged the possibility of buying some of the smaller players in the market, according to company CEO Kamaludin Ahmad.
Other players have also made moves to invest in the insurance market, including Malaysian sovereign wealth fund Khazanah Nasional and Canada’s Sun Life.
In late July international media reports said the two were in talks to acquire the insurance operations of the Hong Leong Financial Group, consisting of a 70% stake in Hong Leong Assurance and its 65% stake in Islamic insurer Hong Leong MSIG Takaful, in a deal estimated to be valued at around RM3.2bn ($792m).
The potential deal would represent the companies’ second joint bid in Malaysia, according to international media reports.
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