Reforms strengthen Malaysia insurance sector

Malaysia’s insurance and takaful, or Islamic insurance, segment has recorded consistent growth in recent years. In 2015 total assets of the insurance and takaful industry expanded by 5.6% to RM264bn ($65.3bn). Within the life insurance and family takaful segment, the growth of takaful contributions has been notable, accounting for almost 18% of new premiums and contributions. Insurance and takaful provide an important avenue for the public to save and invest, in addition to offering a form of risk protection for events such as death, disability and retirement.

The targeted penetration rate for insurance and family takaful policies is 75%. As of 2015 the penetration rate was 54.9%, while in 2014 it stood at 55.5%. In the general insurance and takaful segment, the combined claims ratio edged up from 58.4% in 2014 to 60.2% in 2015, reflecting more challenging business conditions, especially in the marine, aviation and transit line of business.

Market Dynamics

Malaysia’s central bank, Bank Negara Malaysia (BNM), regulates all insurance and takaful entities in the country, including brokers, adjusters and financial advisors. Insurers and takaful operators can only obtain a licence from the Ministry of Finance on the recommendation of BNM, while brokers and financial advisors must be approved by BNM and adjusters are required to register with the bank. 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.

There are seven reinsurers currently operating in Malaysia, including five general reinsurers, one life, and one life and general reinsurer. At the end of 2014 there were 29 insurance brokers operating locally, alongside 41 adjusters and 21 financial advisers, as well as 85,376 life insurance agents and 39,220 general insurance agents. Registered takaful operators on the other hand, rose from nine in 2010 to 11 in 2015, with 64,634 family agents and 16,753 general agents.

In terms of foreign investment, foreign equity ownership in insurance businesses in Malaysia is capped at 70%. A higher level of foreign equity ownership can be considered on a case-by-case basis for players who can facilitate consolidation and rationalisation of the insurance industry.

Economic Significance

Malaysia’s insurance sector is one of the important growth drivers of the financial services sector. According to BNM, total industry assets have increased considerably in recent years, expanding by 12.3% in 2010 to RM44.5bn ($11bn), 7.9% to RM195bn ($48.2bn) in 2011 and 9.9% to RM214bn ($52.9bn) in 2012. In 2013 industry assets rose by 7.3% to reach RM230bn ($56.9bn), and in 2014 they increased by 6.9% to RM246bn ($60.9bn). Asset growth remained at a robust 5.7% in 2015, ending the year at a total of RM260bn ($64.4bn).

In a speech to the Life Insurance Association of Malaysia (LIAM) in 2014, Muhammad bin Ibrahim, the governor of BNM, said that the life insurance industry plays a major role in the development of Malaysia’s capital markets. More than RM150bn ($37.1bn) had been invested by the life insurance industry in the country’s bond market, making it an important source of long-term funding for critical infrastructure. Ibrahim stated that even in episodes of market volatility marked by high capital outflows, the insurance sector has remained a stable contributor to the growth in the overall bond and sukuk (Islamic bond) market.

BNM’S Supervision

Part of this stability can be attributed to BNM’s stringent industry supervision, with issuance of new regulations aimed at improving the stability and sustainability of the sector. Under the Financial Services Act 2013 and the Islamic Financial Services Act 2013, BNM is authorised to oversee financial groups for the purposes of promoting the safety and soundness of licensed insurers and takaful operators.

Prudential requirements applicable to licensed insurers and takaful operators also apply to financial holding companies. BNM is able to specify standards on prudential matters to a subsidiary of a financial holding company if it views these activities as posing risks to the insurers, takaful operators or financial group. It also has the power to issue directions to a financial holding company or its subsidiaries or senior management.

Insurance Penetration

Malaysia’s Economic Transformation Plan (ETP) aims to achieve the economic growth necessary to transform the country into a high-income nation by 2020 and sets a number of targets across all economic sectors to this end. In the insurance industry, the ETP calls for insurance and takaful penetration to hit 75% of the population by 2020 and for the sector’s value as a percentage of GDP to rise from 2.8% to 4% during the same time frame.

In September 2015 Syed Moheeb bin Syed Kamarulzaman, CEO of the Malaysian Insurance Institute, announced that penetration had jumped from 41% to 56% in 2014, putting the country on track to meet its 2020 targets, though this was calculated as the number of policyholders relative to the total population. When measured as the value of premiums relative to GDP, penetration in the life segment amounted to 3.1% and 1.7% in the non-life segment in 2014.

“It is still too early to comment on whether the 75% target is feasible, as the sector is currently undergoing a series of regulatory reforms amid a challenging operating environment. BNM has been active in introducing policies, and it remains to be seen how players will adapt to these reforms and post growth in the future,” Thomas Ng, associate director at Fitch Ratings Singapore, told OBG.

Life Framework

The Life Insurance and Family Takaful Framework notification paper, issued in November 2015, outlines a three-pronged strategy to provide greater operational flexibility in the design of incentive structures for the sale of life insurance and family takaful products. It will also promote the development of alternative distribution channels and strengthen arrangements for ensuring high quality service and advice by intermediaries. A phased approach to implementation, extending from 2016 to 2019, will allow the necessary changes to be reflected in the practices of insurers and takaful operators, and enable it to be socialised with consumers, who have an important role in encouraging greater market discipline in the industry going forward.

One of the key initiatives to be implemented in the initial stage is the introduction of the balanced score card (BSC) to better align the current remuneration structure for intermediaries with quality service and advice. The BSC aims to improve incentives for intermediaries to ensure the suitability of advice based on the financial needs of a consumer; effectively service life policies and family takaful certificates throughout their terms; and pursue continuous professional development, with a strong focus on ethical and professional conduct in the sales and marketing of life insurance and family takaful products.

This will be achieved through the incorporation of non-sales-related, key performance indicators (KPIs) for determining the remuneration of intermediaries. Relevant KPIs include indicators that are linked to the completion of customer fact find forms, and the volume of consumer complaints. A pilot run of the BSC will commence in 2016 before its full implementation in 2018.

Along with other components of the framework, it is envisaged that the reforms will have an important impact on increasing the insurance penetration rate in Malaysia. “We view the initiatives in the framework positively, as it will help insurers to better manage cost structures and expand into other distribution channels in the long run. Online insurance channels will increasingly contribute to higher premium growth over time, underpinned by Malaysia’s favourable demographics and a growing population of tech-savvy citizens,” Ng told OBG.

Life Insurance Performance

According to a statement released by LIAM in February 2016, the life insurance segment recorded 6.2% growth in gross written premiums (GWPs) in 2015 to reach RM1.24trn ($307bn), up from RM1.17trn ($289.6bn) recorded in 2014. When calculated based on new business annual premium equivalent, which equates to 10% of single premiums and 100% of annualised premiums, the life segment grew by 4.3% in 2015, with new business rising to hit RM4.91bn ($1.2bn) compared to RM4.7bn ($1.2bn) in 2014. New business GWPs increased by 1.8% in 2015 to stand at RM9.12bn ($2.3bn).

Group insurance business in the life segment expanded by 15.8% in 2015, while individual business and traditional policies regained traction, outpacing investment-linked business and growing by 5.2% in 2015, compared to 2.3% for investment-linked business. Total GWPs for combined individual and group in-force policies increased by 6.6% in 2015, although claims payouts simultaneously grew by 9% to reach RM9.2bn ($2.27bn), which LIAM attributed to rising medical claims. Death claims also rose in 2015 by 8.9%. Going forward, LIAM expects the life segment to achieve moderate single-digit growth in 2016 as a result of challenging market conditions.

Inadequate Coverage

Although the industry is benefitting from supportive government policy, which includes the introduction of the 1Malaysia Micro Protection Plan, offering policies with premiums less than RM20 ($4.95) per month, these policies may not be offering policyholders the necessary coverage. According to LIAM a total of 12.5m policyholders were covered by life policies at the end of 2015, representing an increase of 129,015 policyholders over 2014. Life insurance per capita rose from RM38,705 ($9,580) to RM39,929 ($9880) in the same period.

While this performance indicates a growing awareness of the importance of life insurance, the per capita insurance ratio is still “way below the amount needed” in the event of death or disability of a breadwinner, according to a University Kebangsaan Malaysia and LIAM report, released in 2013. The report also showed that the mortality gap for each family member stood at a total of RM100,000-150,000 ($24,753-$37,130).

More Challenging Conditions

Malaysia’s GDP growth remains steady, hitting 4.7% in 2013 and 6% in 2014, according to data from the World Bank, and outperforming expectations to reach 5% in 2015. However, global oil and commodities volatility, and the resultant currency depreciation – the ringgit’s value fell by 20.5% in 2015 – has presented considerable challenges to insurance stakeholders. In the non-life segment, for instance, these factors, combined with the recent introduction of government sales tax (GST), have negatively impacted growth and expansion since the middle of 2015, with industry stakeholders particularly opposed to the GST.

Growth Moderating

The General Insurance Association of Malaysia (PIAM) reported in March 2016 that the general insurance industry grew by 2.3% in 2015 to reach GWPs of RM17.49bn ($4.3bn), compared to growth of 5.9% in 2014. According to PIAM, underwriting profits were slightly lower than in previous years, hitting RM1.46bn ($361.4m) in 2015, compared to RM1.49bn ($369m) in 2014, although this was in line with expectations, with analysts adjusting forecasts to between 3% and 4% midway through 2015 following a somewhat lacklustre first half of the year.

Tax Burden

Although Chua Seck Guan, chairman of PIAM, praised BNM’s strict capital adequacy requirements for supporting stability, he stressed that currency depreciation has had a dramatic impact on the cost of replacement and spare parts for vehicles, machinery and property, driving up losses in the motor segment.

Chua also noted that the imposition of GST, combined with the government’s decision to prohibit insurance companies from claiming an input tax credit on motor claims costs, has further worsened the situation. “GST is a tax chargeable on the end-user of a good or service. Insurance companies are not end-users of insurance services in this instance but are the service providers. PIAM holds strong feelings in regard to this different interpretation on the ability to claim input tax credit for repairs carried out on an insured’s property and has appealed to the Ministry of Finance accordingly,” he wrote in a March 2016 statement to the Asian Insurance Review.

Motor & Fire Insurance

According to PIAM, motor insurance remains the dominant line of non-life business in Malaysia, with a market share of 46.3% and growth of 2.1% in 2015 to RM8.1bn ($2bn) in GWPs, up from RM7.95bn ($1.95bn) in 2014. The segment is struggling, with PIAM reporting that it was “mired in red” in 2015, after incurring heavy losses of RM292m ($72.3m), and RM166m ($41.1m) in 2014.

Although the overall industry’s net claims incurred ratio (NCIR) remained steady throughout 2015, falling from 56.7% in 2014 to 56.5%, total claims incurred within the motor segment remained exceedingly high, hitting RM5.29bn ($1.3bn) in 2015, or RM14.5m ($3.6m) in claims payments made every day. As such, the motor segment’s NCIR remained high throughout 2015 at 72%, compared to the 71.5% recorded in 2014.

Insurers have benefitted from falling vehicle thefts, which dropped by 18% to 24,906 cases in 2015; however, Malaysia’s high rates of road accidents and fatalities remain a major cause for concern. In 2015 third-party bodily injury claims rose by 8% to reach RM1.94bn ($480.2m), according to PIAM, the majority of which were caused by human error. In the fire segment, meanwhile, growth jumped by 5.5% to hit RM3.1bn ($767.4m) in GWPs in 2015, representing a 17.8% market share, and making fire the second-largest non-life segment. The NCIR for fire stayed stable in 2015 at 28.3%, compared to 28.8% in 2014.

Medical & Health

The insurance industry’s medical and health segment contracted by 4% to hit RM966m ($239.1m) in GWPs in 2015, which PIAM attributed to a product rationalisation exercise by a member company that reclassified its medical and health insurance portfolio from its general insurance fund to its life insurance fund. Excluding this reclassification, the segment actually expanded by 15% in 2015.

Tariff Liberalisation

To help support growth and profitability in Malaysia’s two largest non-life segments, BNM is advancing its phased liberalisation of motor and fire tariffs plans, which will move towards risk-based pricing. As detailed in BNM’s “Financial Stability and Payment Systems Report 2015”, published in March 2016, BNM will gradually move to fully liberalise motor and fire insurance tariffs, which will enable the insurers and takaful operators to both manage risk and better reflect prevailing market conditions. More importantly, taking the phased approach allows time for consumers and industry to adjust to the new operating environment.

In the first phase, which is set to start on July 1, 2016, insurers will progressively offer new products to consumers at market rates. Existing motor third-party and motor comprehensive products, and motor third-party fire and theft products will continue to be made available.

The second phase of the roadmap, which will also be rolled out in 2016, will see the liberalisation of premium rates for motor comprehensive, and motor third-party fire and theft products. In parallel, a more gradual upward adjustment, similar in scope to the adjustment to tariffs made between 2012 and 2015 under the New Motor Cover Framework, will be carried out for some vehicle classes under the motor third-party cover, which remains substantially underpriced. This measure will be taken to avoid sharp, upward premium rate adjustments that could occur if this class of coverage was immediately liberalised.

In order to allow insurers and takaful operators enough time to rebalance their portfolios gradually, premium rates for fire class protection will continue to be regulated under the tariff, with gradual downward adjustments made until a review is undertaken at some point in 2019.

The progress of liberalisation will be reviewed in 2019, with an assessment of the impact on consumers and industry, before full liberalisation of the motor and fire segment takes place. “With liberalisation, we expect motor insurers to have greater flexibility in pricing their risks adequately and to improve underwriting margins over time. Consumers will be able to choose and add on what they want, making the policy beneficial to insurers and policyholders alike,” Ng told OBG.

Outlook

Despite prevailing economic headwinds, the insurance sector in Malaysia continues to be in a strong position to capitalise on growing domestic demand and stable macroeconomic fundamentals. Although the imposition of GST, currency depreciation, decreasing trade exports and a slowdown in oil prices will continue to challenge the sector throughout 2016, ongoing reforms coupled with high growth potential in both the life and non-life segment should see the sector continue on an upwards trajectory in 2016.