Sound progress: Further consolidation is likely, while reforms are taking place

With business increasing and consolidation proceeding apace, the insurance sector in Malaysia has been on a steady growth path for a number of years. It has been tracking general economic expansion, while at the same time benefitting from increased awareness, improved marketing and general and insurance-specific reforms. The sector is also sound and stable. It is tightly regulated and well capitalised and has come under better supervision as the new Financial Services Act (FSA) went into force in July 2013. Insurance penetration, however, while improving, remains low. More foreign investment and consolidation may help – as critical mass and technology could improve products and marketing and result in a wider range of Malaysians buying insurance – but for now insurance remains the least visible sub-sector in financial services.

The Malaysian insurance industry has a long history. It began when the Union Insurance Society of Canton set up an agency in the country (records also show that Guardian Assurance was selling fire insurance in Penang in the 1860s), and quickly evolved in the early 20th century as British and US companies established themselves in the country directly or through agencies. For years, the sector remained dominated by non-Malaysian interests. In 1955, 95% of business was conducted by foreign insurers, according to the Malaysian Insurance Institute. But that quickly changed. The New Economic Policy of 1971 encouraged local ownership, and as a result 41 foreign insurers developed into 31 Malaysian companies over the following 16 years. For a time, the sector was lightly regulated, and poorly capitalised companies entered the market. The situation has improved greatly since. In 1961 minimum paid-up capital was set at $1m for newly established insurers, an Insurance Act was passed in 1963, and in 1987 Bank Negara Malaysia (BNM), the central bank, took over the sector’s supervision from the Ministry of Finance.

Growing Assets

Despite being well established in the country, insurance remains a fairly small part of Malaysia’s financial industry. According to recent IMF calculations, the sector holds only 6% of the country’s financial assets, and its assets are equal to around 15% of GDP. It has also been growing at a fairly slow, albeit steady, clip. According to BNM figures, gross premiums among general insurers went from RM10.18bn ($3.2bn) in 2009 to RM13.8bn ($4.3bn) in 2013 in terms of domestic business and from RM11bn ($3.4bn) to RM15.5bn ($4.8bn) in terms of global business. Annual premiums for life insurers have risen from RM17.4bn ($5.4bn) in 2009 to RM23.3bn ($7.3bn) in 2013. The sector is anticipating much of the same for 2014, with the General Insurance Association of Malaysia (PIAM) predicting 6.9% expansion for the full year. The sector is, however, more optimistic about prospects over the long term. PIAM says that growing awareness, increased competition and inflation will help boost premium income in the coming years – the latter boosts demand because policy holders want to make sure they are not under-insured as the cost of materials increase.

Towers Watson, a US insurance consultancy, is also anticipating a strong future for the sector. It forecasts 8% growth for life insurers through 2025. The company says that the good economic conditions will lead to more demand, and relatively low penetration, which it puts at 54% for life insurance and family takaful, means that the sector has considerable room to grow (the Life Insurance Association of Malaysia, LIAM, puts the rate at 43% for life insurance products).

Way Forward

Towers Watson points out that the way insurance firms engage in marketing has changed, which could be a positive for the sector. Because of growth in the middle class and the increase in the amount of available information, insurers are now rebranding themselves as lifestyle companies. They are casting off the sometimes negative image of insurance sales and beginning to engage their potential clients in a more positive and constructive way. Insurers need to change the way they talk about insurance,” said Ooi Say Teng, CEO of Sun Life Malaysia. Technology is also helping in research, development and design, according to Towers Watson. Product lines are greatly simplified and more targeted, allowing quicker and less complicated interaction with customers.

Meanwhile, education and product innovation will be vital to the sector, as insurance is not fully understood by many Malaysians. Life insurance is a particular blind spot for the average person in the country. They do not see it as a financial planning tool, as it is widely believed to only pay out after death, and are wary of spending money on anything that does not return anything tangible in the near term. In 2012 LIAM undertook a study on the so-called mortality gap and found Malaysian families to be on average under insured. The 2012/13 Protection Gap Study estimated that the protection gap for the average family with life and health insurance is RM553,000 ($172,591), meaning that if the breadwinner were to die the family would be short that amount over a five-year period. For those without any insurance, the gap is RM723,000 ($225,648).

Government Moves

Government policy is seen for the most part to be helping the insurance sector to grow. The Economic Transformation Programme (ETP), which is meant to boost economic growth throughout the country, with the long-term goal of turning Malaysia into a high-income nation by 2020, calls for 75% of Malaysians to be insured by that year, taking insurance as a percentage of GDP from 2.8% to 4%. The insurance goals are known as the Financial Services Entry Point Project 5. Inclusion, as much as expansion, is a big part of the push. To that end, BNM in 2011 initiated the 1Malaysia Micro Protection Plan, which makes policies available to Malaysians for as little as RM20 ($6.24) per month.

Safety and soundness have been key elements of the government’s efforts. Capital is one of the main focuses, and risk-based capital regulations have been in effect since January 2009 (and was effective for takaful on January 1, 2014). All insurers are required to set their own level of capital based on their levels of risk, with the minimum supervisory capital set at 130%. According to BNM statistics, the sector has been well above the floor and has become better capitalised over time. In the first half of 2009 the average capital adequacy ratio for insurers was 212.4%. By the second half of 2013 it had reached 245.9%. The push toward risk-based capital has been ongoing in Asia for some time: Indonesia adopted the practice in 2000, Taiwan in 2003 and Singapore in 2004. BNM is taking a tough stance on risk management in general and has been closely watching and making recommendations on strengthening certain relevant practices and structures. In its guidelines on risk governance, published in early 2013, the central bank said that actuaries must be independent of the business units at insurance firms and not involved in product development or design.

Motor insurance is by far the largest segment in the insurance industry, followed by fire in second place, and it is in the process of undergoing significant deregulation. In late 2012 the BNM announced that rates for motor insurance would be gradually freed over a four-year period. The hope is that the sub-segment will become more profitable and that this will help the overall fortunes of the sector. Claim ratios, especially in terms of third-party bodily injury and death, are very high, with an industry-wide claims ratio of about 300% in 2011. The ratio has since fallen to under 200 (195% in the second half of 2013). “This is a big event for general insurance,” said Kong Ho Meng, research analyst at RHB Research. “It will change the whole landscape.”

FSA 

As with the entire financial sector, insurance is set to experience considerable changes as a result of the passing of the FSA 2013, which repeals the Insurance Act 1996. According to Towers Watson, the act will make institutions more accountable and protect consumers. Most importantly, composite insurers now have a grace period of up to five years, or as specified by the BNM under special circumstances, to separate their life and non-life business into distinct entities.

Some government initiatives are not seen as helping the sector. The new goods and services tax (GST), which will be introduced on April 1, 2015, may result in a rise in premiums, according to Towers Watson. While premiums are exempt from the new tax, commissions paid to agents and costs incurred in the conducting of business will attract the GST. The added costs end up affecting final premiums and thus demand. Other regulations that are impacting the sector are the Competition Act of 2010, the Personal Data Protection Act 2010 (PDPA), which are now coming into effect, and the US Foreign Account Tax Compliance Act (FATCA). The PDPA came into force in November 2013 and requires insurers to make sure customers are aware of their rights and that they are told if and when their information is disclosed to third parties. FATCA considers insurance contracts with cash value, such as whole life policies and annuities, as financial accounts and subject to the provisions of the law, though the rules are complicated and the compliance burden to figure how to stay within the law will be considerable.

Some reforms are having a potentially negative impact on the sector. As a result of the Financial Sector Blueprint, which calls for a more stable and competitive financial sector, insurance firms are facing a talent shortage. According to comments made by Mohamed Hassan Kamil, Syarikat Takaful Malaysia’s group managing director, and others, poaching and job hopping have become a challenge for the sector, and it has been difficult for firms to staff key positions. The FSA, which requires the hiring of more higher-level professionals, has the potential to exacerbate the bottleneck.

Bancassurance

Bancassurance was approved by the central bank in 1993, and the popularity of this channel has increased in recent years. While it is hard to pin down the exact amount of insurance that enters the market via banks, it is clear this has become an important route to the customer. A recent study by LIAM estimated that 30% of life products made it to market through bancassurance. According to public comments made in early May 2014 by Donald Jaganathan, assistant governor of BNM, bancassurance generated 16% of the weighted new premiums in 2013, compared with 80% via the agency channel. He added that 20 financial institutions, including the post office, were working with 13 life insurers to sell insurance products and that the partnerships make sense because bank employees have some of the same training and must meet the same standards of professionalism as insurance agents. The IMF said in a 2014 report that agencies account for 59% of new life premiums and 65% of gross general insurance premiums.

Institutions are becoming increasingly interested in this distribution method. In September 2013 Allianz Malaysia said that it anticipated that its bancassurance business would grow by 30% in 2014, largely due to new moves by the central bank to shorten the duration of mortgages. The company added that it expected sales through banks to grow to 20% of its total sales in a few years’ time. Around 90% of its business is through agencies, with bancassurance as the fastest-growing channel for the firm’s life products. Alliance Bank, meanwhile, said that it anticipates its bancassurance business growing 20% in 2014 as it works with Manulife. Banks have been particularly interested in insurance since the 2008 global financial crisis, and in light of the low interest rates since then, they have been on the lookout for non-interest income. Other notable bancassurance tie-ups include Public Bank and ING Insurance, which is now Public Bank, and AIA, RHB and AIA, OSK and Manulife and CIMB and Sun Life. Maybank has its own insurance arm, Etiqa Insurance, while Affin Bank has had a joint venture with AXA, the French conglomerate, since 2006. AXA AFFIN signed a bancassurance agreement with ICBC Malaysia in August 2013.

Foreign Investment

According to the IMF’s Financial Sector Stability Assessment 2013, the general insurance side of the sector is fragmented and still has a way to go in terms of product development. Foreign participation is high, the fund says, but no new licences have been issued for more than 30 years and a 70% foreign equity limit remains. Foreign insurers can get a higher equity stake with government approval. New insurers need capital of RM100m ($31.2m). Deloitte warns that establishing an agency channel, which is responsible for two-thirds of all insurance sales in the country, can be a challenge.

According to the US State Department’s Investment Climate Report 2013, all branches of foreign insurers need to be locally incorporated, a rule put into effect after the 1997-98 economic crisis. It is expected that the FSA, in addition to the higher shareholding limits on foreign companies, will result in consolidation. The requirement that insurers only have one line of business will mean that units will be available for purchase while heightened scrutiny of the sector by the regulators may make it less attractive to smaller players.

At the end of 2013 the country had 19 general insurers, nine life insurers and five combined life and general firms, according to BNM. In total, the industry has fewer insurers now than it had 20 years ago. In 1991, it had a total of 57 direct insurers. Now, it has 33. Consolidation has been slow but steady, and what was a fragmented industry is approaching a state more like that in other economies. According to research by RAS Actuaries presented in October 2013, the market share for the top-five life insurers in the first half of 2012 was 70.69%; a year later it was 76.43%. The same trend was noted in general insurance. At the end of 2011 the top-five insurers had 42.35% of the market. A year later, that number had jumped to 47.75%.

A number of major deals have taken place in recent years. In 2014, during the visit of US president Barack Obama, Metlife invested RM812m ($253.4m) in AmLife Insurance and AmFamily Takaful, two AmBank Group subsidiaries majority-owned (50% plus one share) by the Malaysian financial group. Under the agreement, the US firm will provide management expertise while the insurance subsidiaries will provide products for the bank to sell under a 20-year agreement.

Sun Life of Canada and Khazanah Nasional, Malaysia’s sovereign wealth fund, also acquired a controlling interest in CIMB Aviva, for RM1.8bn ($561.8m) in 2013. In the deal, the two acquirers took 98% of the equity and left the bank with 2%. The company says it wants to go from being the number 12 insurer to number eight and gain a 2.8% market share by 2015. It also says that its strategy is unique, in that it will not be using agents. All sales will go though CIMB’s branches, which number over 300, or via direct sales channels, such as over the internet or to corporate or government entities. It is also working to develop tailored products for clients.

A number of other foreign investments have also been undertaken over the past few years. In January 2014 DRB Hicom sold Uni.Asia Life to Prudential of American for RM518m ($161.7m), and in February the firm disposed of its 68.1% interest in Uni.Asia General Insurance to Liberty UK and Europe Holdings. In late 2012 AIA bought ING Group’s Malaysia insurance business for €1.3bn. Zurich Insurance acquired a 40% stake in Malaysia Assurance Alliance, now Zurich Insurance Malaysia, in 2011. As a result of that purchase it has been forced to divest an interest in MCIS Zurich, a local life and general insurer that it owns along with Koperasi MCIS. Under BNM rules, a foreign company cannot own major stakes in two insurers. Zurich was also forced to pay an additional sum over and above the purchase price to MAA due to a dispute over funds in an escrow account. Meanwhile, in 2010 Mitsui Sumitomo Insurance bought 30% of Hong Leong Assurance.

Outlook

The insurance sector is only part of the way through the consolidation process. More mergers can be expected, and as that happens insurance firms are likely to improve their operations and management. The insurance sector should become more like the banking sector, with a few solid and profitable players. Close monitoring by the central bank will continue, and risks will be further lowered in the already sound sector. Questions remain about the pace of deregulation of motor insurance policies and what that will mean for insurers, and the profitability of the sector will be closely watched, but few if any surprises are anticipated.