Promising outlook: Islamic financing brings further potential to a healthy sector

These are times of substantive change in Malaysia’s insurance sector. With financial market liberalisation, alongside more stringent capital and regulatory requirements, consolidation is occurring parallel to greater involvement by many international players. With the market still showing plenty of upside potential as well, given relatively low penetration rates and rising per capita incomes, this international interest seems set to continue growing during the years ahead.

SECTOR BODIES: Insurers – Islamic (takaful) and conventional – come under the authority of the central bank, Bank Negara Malaysia (BNM). It is the regulator and supervisor, working to three main bodies of rules: the Insurance Act of 1996, the Insurance Regulations of 1996 and the Takaful Act of 1984. In addition, there have been a number of guidelines and regulations issued since, most notably the recent announcements on risk-based capital (RBC) implemented for conventional insurers from 2009, and currently being put in place for takaful insurers (see analysis). Other significant guidelines include those on bancassurance, transparency and disclosure, investment-linked business, the introduction of new products and the operating costs of life insurance businesses.

Rules on tariffs for property, motor and workers’ compensation insurance are also set by BNM. These include a minimum tariff for motor, currently being adjusted, while all property up to RM50m ($16.1m) in value is subject to set tariff controls. Property valued over that can obtain a tariff on a more competitive basis.

PLANS: The Malaysian government has long taken an active interest in the development of the sector. In 2001 the government issued its Financial Sector Master Plan, with 2011 seeing this followed by a further overall plan, the Financial Sector Blueprint 2011-20. This latest programme aims to give the country a financial – and insurance – sector in line with Malaysia’s projected 2020 achievement of developed nation status. An emphasis on higher-value-added products and investments and the development of the country as a global Islamic finance and takaful centre are all part of the plan, as is a move towards further liberalisation, including the lifting of ownership restrictions in insurance and the end of tariff setting by BNM.

On the professional side, two main organisations dominate conventional business – the Life Insurance Association of Malaysia (PIAM) and the General Insurance Association of Malaysia (LIAM). On the Islamic finance side, the Malaysian Takaful Association (MTA) represents sector companies, with the Joint Insurance-Takaful Council (JITC) bringing agents of all three organisations together on matters of common interest.

FACTS & FIGURES: According to data from BNM, as of year-end 2011, there were 37 Malaysian-incorporated conventional direct insurers operating in the country, along with three Malaysian-incorporated and four foreign incorporated reinsurers. There were also 37 insurance brokers, 36 adjusters and 17 financial advisors in operation. The number of direct insurers fell from 39 in 2010, while all other numbers had remained constant. The decrease was part of a wave of merger and acquisition activity in the sector after the introduction of RBC in 2009, although numbers have been declining historically. In 2008 there were 42 direct insurers, while in 1990 there were 57.

Breaking the statistics down into life and non-life, from 2008 to 2011, there have been the same number of Malaysian-registered life insurance companies – nine – while the number of general insurers has fallen from 26 to 22. The number of companies conducting both activities has also fallen, from seven to six.

The BNM figures show that premium income in the sector overall was RM36.65bn ($11.82bn) in 2011, up from RM31.932bn ($10.301bn) in 2010. The 2011 figure was equivalent to 4.1% of gross national income (GNI), down from 4.3% of GNI in 2010 and 4.4% in 2009.

Life made up 2.7 percentage points of the 2011 figure, continuing the trend of life contributing greatly that began back in the 1990s. In 2010 life contributed 2.9 percentage points and 3.0 percentage points in 2009.

Per capita expenditure on insurance premiums remains relatively low compared to international and regional norms. In 2011 Malaysians spent an average of RM797 ($257) on life insurance and RM475 ($153) on general insurance, slightly up from 2010, when the figures were RM770 ($248) and RM445 ($143), respectively. In Singapore, the 2010 figure was around $722 for non-life alone, according to a 2011 Lloyds report.

In terms of net premiums, in non-life in 2011, the sector remained dominated by motor. This totalled RM5.968bn ($1.984bn), up from RM5.659bn ($1.825bn) in 2010. The next largest was medical expenses and personal accidents, which rose from RM1.55bn ($500m) to RM1.769bn ($570m) over the same period, while in third place came fire, with net premiums in this line of business rising from RM1.496bn ($482m) to RM1.563bn ($504m) between year-end 2010 and year-end 2011.

Between 2009 and 2011 net claims paid rose slightly from RM5.56bn ($1.793bn) to RM5.8bn ($1.871bn) and then RM5.89bn ($1.9bn). After rising from 60.7% to 62.6% between 2009 and 2010, the claims ration fell to 60.3% in 2011. By line of business, motor had the highest claims ratio, as in many countries, at 76.2% in 2011, down from 81% in 2010. Within this, however, claims under the minimum third-party coverage required by the 1987 Road Transport Act rose from 290.5% in 2010 to 296% in 2011, underscoring many insurers’ claims that motor needs some significant reexamination by the authorities. The next highest claims ratio was medical and personal accidents, at 43.7% in 2011, down from 50.7% in 2010, followed by marine, aviation and transit, which saw the ratio rise from 36.8% to 42.3% over the same period.

LIFE SEGMENT: In the life segment, premium income has been on a steady upwards trajectory for the last few years. In 2009, conventional life saw RM19.83bn ($6.40bn) of premiums, rising to RM21.8bn ($7.03bn) in 2010, then RM22.79bn ($7.35bn) in 2011. The value of new business also rose, with sums insured rising from RM239.6bn ($77.2bn) to RM274.76bn ($88.63bn) and then RM287bn ($92bn) over the same three years. The value of business in force therefore also rose, with sums insured going from RM791.36bn ($255.29bn) to RM881.935bn ($284.512bn) and then RM948.66bn ($306.03bn) during the period.

Broken down by policy type, the largest category was temporary policies, with 43.3% of the total sum insured in 2011, slightly up from 43.2% in 2010. Next largest was investment-linked policies, which saw its share rise from 21.1% to 22.6% between 2010 and 2011. Third largest was whole life, which fell from 21.4% to 20.2%.

Meanwhile, net investment income for the life sector rose from RM4.926bn ($1.589bn) in 2009 to RM5.448bn ($1.757bn) in 2010, then RM6.034bn ($1.946bn) in 2011. In reinsurance, the picture was one of a steadily increasing retention ratio, as Malaysian-registered insurers conducted more of their reinsurance business within the country. The retention ratio was 92.1% in 2009, rising to 92.2% in 2010 and 92.6% in 2011. The overseas reinsurance business continued to grow, from RM610.8m ($197m) in 2009 to RM698.9m ($225.4m) in 2010 and then RM814.3m ($262.6m) in 2011, demonstrating how the overall insurance market has been getting larger, with more for everyone.

RISE OF TAKAFUL: Recent years have seen a steady increase in the numbers of takaful players in the Malaysian market. According to BNM data, in 2009 there were eight registered takaful operators, rising to nine the following year, then 11 in 2011. The number of agents operating in the segment has also grown. In 2009 there were 55,898 agents working in family takaful and 32,997 in general, with these numbers rising to 66,338 and 33,970, respectively, by 2011.

Takaful fund assets also grew from RM12.445bn ($4.014bn) to RM16.948bn ($5.467bn) over the same period, as did net contributions, which rose from RM3.52bn ($1.13bn) to RM4.42bn ($1.42bn) and then RM4.86bn ($1.56bn) over the three years in question.

As a percentage of GNI, takaful contributed 0.5% in 2009, rising to 0.6% in 2010 and 2011. For each of the three years general takaful also contributed 0.1 percentage points. Per capita expenditure on family takaful rose from RM97.4 ($31.4) to RM129.5 ($41.7) over the same period. Takaful thus still accounts for a relatively small part of the market, yet one that is rapidly growing (see Islamic Financial Services chapter).

MOTOR: Amongst non-life insurers, the way forward for motor has seen debate in recent times, as this line of business has historically seen high claims, with a recent rocketing of net claims incurred ratio (NCIR) for compulsory third-party bodily injury and death liability (known as “Act” cover, after the Road Transport Act).

This hike in claims has been particularly arduous for many insurers, as the motor tariff rate, set by the BNM, had not been revised for some 34 years, until January 2012. That month BNM announced that it would allow tariffs to rise gradually over the following four years. The examples given by BNM allowed for an annual increase of RM1 to RM3.50 ($0.32 to $1.12) in tariffs for a 100 cc motorcycle, and an increase of RM6 to RM34 ($1.93 to $10.96) for a 1400 cc car. For commercial vehicles, the increase is set at under RM0.10 ($0.03) per passenger per trip. At the same time, a New Motor Cover Framework was adopted by the industry, thanks to efforts by the PIAM, BNM and the public, who gave their input via various surveys. With some firms reluctant to give cover, especially for older vehicles, providing a wider “service of last resort” while boosting the efficiency of its delivery were seen as going hand in hand within the framework, with gradual hikes in premium.

This meant increasing access to the Malaysian Motor Insurance Pool (MMIP), which had originally been established to provide cover in high-risk cases, yet was provided by only two general insurers. Under the new framework, availability of MMIP cover has been widened to include other insurers and even the post office, Pos Malaysia, which is authorised to provide MMIP cover.

PUSHING FORWARD: A joint working committee (JWC) has been established to push motor forward again, with plans including the establishment of a nationwide, 24-hour call centre, a review of the legal fees in bodily injury cases and better tie-ups with hospital counters to help process claims. The JWC will also periodically review tariff increases to see if they need adjustment. Sector insiders hope these steps will help in alleviating some of the pressure on the losses many general insurers are currently making on motor, while moving the segment forward to complete de-tariffing in 2016.

“By 2016,” Lim Chia Fook, executive director/secretary of PIAM told OBG, “there should be a balance in place in motor and the market should be ready for a de-tariff environment.” This prospect already appears to be attracting more foreign interest. AmG Insurance, the Malaysian joint venture of Insurance Australia Group (IAG), acquired Kurnia Insurance in April 2012, thus increasing its profile in the motor market.

FIRE: In fire, the last few years have seen a steady decrease in tariff levels imposed by the authorities. The business has been increasingly profitable too, with net premiums rising by 4.7%, year-on-year, in 2010 and 4.5% in 2011. The ultimate claims ratio remains lower than in many other lines of business. The most recent figures available from BNM show a ratio of 29.6% in 2009 and 34% in 2010, while for marine, aviation and transit the rates were 44.9% in 2009 and 48.2% in 2010.

Nor bin Hj Ibrahim, the director-general of Malaysia’s Fire and Rescue Department, told OBG, “Improved awareness of building laws and codes as well as greater attention on maintenance helped reduce the value of nationwide property damage due to fire from RM1bn ($322.6m) in 2009 to RM750m ($241.95m) in 2010.”

“Property has always been a good area. Fire insurance for property such as manufacturing, wooden furniture factories and so on have seen rates increasing in recent times too,” Mohamad Abdullah, the managing director of AAO Global Insurance Brokers, told OBG.

The assumption amongst industry players is that property – and thus fire – will also be de-tariffed by 2016, with this line of business tied legislatively to motor, as both are subject to BNM tariff setting.

MEDICAL & TRAVEL: Another profitable line of business is medical, with premiums growing steadily in recent years. In 2009, according to PIAM, medical saw RM587.3m ($189.4m) in premiums, rising to RM643.5m ($207.5m) in 2010 and RM822.2m ($265.2m) in 2011. Premiums could pass the RM1bn ($322.6m) mark in 2012. The claims ratio in medical has been high, however, at 73.6% in 2009 and 77.4% in 2010, yet in 2011 it fell to 64.4% as better controls came in. Sector players told OBG medical will also likely benefit from more regional tie-ups, with medical tourism bringing in patients and boosting premiums. In a similar vein, an increase in travel insurance sales was also reported, particularly since the Malaysian Association of Tour and Travel Agents (MATTA) made outbound travel insurance compulsory for most trips abroad from March 1, 2012.

Another area that may see future growth is liability. Malaysia’s legal liability laws often date back to the 1950s, with a review of these currently in progress. If the law is brought up to date, this could generate more interest in areas such as professional indemnity. Foreign worker liability in particular may attract attention.

CHOOSE LIFE: Although 2011 saw some decline in Malaysia’s life insurance business, the sector has seen steady growth in recent years linked to the nation’s broader economic expansion. According to World Bank figures, with the exception of 2009, when the global financial downturn hit, the last decade has seen the economy grow every year, with 2010 seeing 7.19% GDP expansion and 5.14% in 2011. GDP per capita at current prices was RM26,175 ($8444) in 2010, according to the latest available Malaysian Department of Statistics figures, up from RM24,375 ($7863) in 2009.

LIAM data for February 2012 show that in 2010 total life premium stood at RM8.42bn ($2.71bn), declining some 6% to RM7.92bn ($2.55bn) in 2011. The shrinkage was a result of a marked decline in traditional individual products – which fell 18.5%. However, this was the result of one particular insurer’s new strategy, rather than any systemic change. On the whole, annualised premium rose 8.9% between 2010 and 2011, with traditional increasing 7.6% and investment-linked by 10.5% – a distribution which has seen the overall ratio of traditional to investment-linked shift from 54.9:45.1 to 55.6:44.4 over the two years.

The life market is highly concentrated, with 2010 figures showing around 88% of all business going to the top 10 life and life/general insurers. Most of the top firms are also the Malaysian-registered wings of internationals, such as Prudential, AXA and AIA, with Etiqa Insurance and Takaful the largest Malaysian national insurer in the top ranks. The year 2012 saw some important initiatives in life. One of these was the establishment by LIAM, PIAM and the MTA of the 1Malaysia Micro-Protection Plan (1MMPP), which seeks to expand coverage – life, non-life and takaful – to small and medium-sized enterprises (SMEs). These constitute a major part of the economy, yet have traditionally stayed outside the financial sector and have much potential.

Another area with great potential is health. Malaysia is currently reviewing its national health system, with the likely outcome that life insurers will take more responsibility in this area.

“The population is slowly starting to age,” Vincent Kwo Shih Kang, president of LIAM, told OBG. “The retirement age is still 55 here, an age linked to when life expectancy was much lower. So, in 2011, the government announced it had begun looking at private retirement schemes as an area of potential.”

Indeed, potential is the key phrase in life, with low per capita spends likely to grow as the economy expands. This lies behind much of the interest shown by global life insurers in Malaysia, with, for example, Aviva’s decision to auction its Malaysian business in 2012 attracting great outside interest from Prudential, Manulife and Sun Life. AIA had originally been a shortlisted suitor, but has since dropped out and is now believed to be interested in acquiring ING’s local insurance unit.

DISTRIBUTION: The Aviva sale is also of interest because Aviva is in a joint venture with CIMB bank, providing a bancassurance channel for policy distribution. While the majority of life business is conducted by agents, bancassurance is widely seen as the channel of the future, with many other insurers already capitalising on banking link ups – such as Etiqa’s link with Maybank, its majority owner – or trying to establish them, such as Alliance Bank’s arrangement with AIA. PruBSN, Prudential’s takaful arm, has also linked up with Standard Chartered Saadiq, the international bank’s Islamic arm, to offer takaful products via bancassurance.

However, this growth in distribution channels also highlights a widespread concern in the sector over human resources. Many insurers who spoke to OBG said that with product diversification and sector expansion, a higher standard of brokers, agents and sales staff was required – yet filling posts was proving challenging.

The government has boosted the training and educational skills of future insurance employees, introducing the Financial Sector Talent Enrichment Programme in 2007. This provides six months of training, followed by a six-month work placement. Life and takaful agents are also undergoing examination – although a very low pass rate in the Takaful Basic Examination in 2012, just 10%, caused some alarm amongst employers.

The insurance sector also suffers from the issue of “brain drain”, with graduates often heading to higher salaries in neighbouring Singapore or further afield. Tackling this issue will likely therefore take time and increasing effort from insurers and government agencies, with both firmly committed to doing this.

OUTLOOK: In both life and non-life, sector players remain bullish about future growth prospects, estimating great potential for the market. “If Australia has three times the level of premiums as we do, yet with a roughly similar sized population,” said AAO’s Abdullah, “then you can see we have a lot of room for growth.”

With the move to RBC and market liberalisation well under way, the Malaysian insurance sector looks set to develop from some stronger foundations in the years ahead. Furthermore, following an easing of previous restrictions on foreign ownership of Malaysian insurers, the sector is also increasingly open for foreign insurers and investors, and with much to play for.