Safeguarding a stable future for the insurance sector

The insurance industry is a thriving sector, set to see continuous growth on the back of growing demand and the increase of consumer awareness on businesses and individual risks. In addition its growth trajectory is currently in the process of receiving a boost via the evolution of Malaysia’s financial legal framework. With it being at the crossroads of major regulatory developments aimed to increase solidity and consumer protection as well as preserve a greater level of confidence in the financial system, the sector looks set to see sizable transformations over the coming years.

BizHive Weekly takes a glimpse at the recent changes in the insurance and takaful sector.

The insurance industry can be seen as a thriving sector, set to see continu­ous growth on the back of grow­ing demand and the increase of consumer awareness on busi­nesses and individual risks.

According to statistics by Life Insurance Association of Ma­laysia (LIAM), the Malaysian population covered in various life policies showed an increase of eight per cent from figures in 2011 at RM946 billion.

“As at December 2012, the Malaysian population was cov­ered with RM1.02 trillion sum insured in various forms of life policies,” it explained, adding that the average sum insured works out to be RM34,700 per capita for 2012, an increase of 6.7 per cent from RM32,533 in 2011.

LIAM further revealed that the total life insurance claims amounting to RM6.7 billion was paid in year 2012 as compared to RM5.6 billion for the year 2011, an increase of RM1.1 billion or about 19 per cent.

It elaborated, “The RM6.7 bil­lion includes various types of claims payment namely death, disability, medical and cash bonus payment.

“On top of RM6.7 billion, an additional amount of RM7.6 billion was paid for maturity of policies and cash surrender in 2012.”

Overall, the life insurance industry registered a new business growth of 2.2 per cent, with RM4.3 billion weighted premium in 2012 as compared with RM4.2 billion in 2011, LIAM stated.

Meanwhile, Malaysian Rat­ing Corporation Bhd (MARC) reported in an economic research report, the growth of the takaful industry was phenom­enal in the past several years.

“Its new business family contri­butions have grown by 20.2 per an­num per annum on a compounded annual growth rate (CAGR) basis between 2003 and 2011, compared with a CAGR of 6.3 per cent per annum for conventional new business premiums.

“Similarly, for general insur­ance, takaful’s gross direct con­tributions surged from RM551 million in 2005 to RM1.6 billion in 2011, rising by a CAGR of 19.4 per cent per annum, compared with a 6.4 per cent per annum growth on a CAGR basis for the general conventional gross direct premi­ums within the same period,” it explained.

Additionally, Bank Negara Malaysia’s (BNM) governor, Tan Sri Datuk Seri Dr Zeti Akhtar Aziz said in keynote address at the 26th East Asian Insurance Congress ‘Transforming the East Asian Insurers – Time for Action Now’, the penetration rate, as measured by the number of life policies to total population, increased sig­nificantly to 55 per cent, from 31 per cent in 2000.

“Total premiums to gross domestic product (GDP) in­creased from 4.1 per cent to 4.5 per cent over the same period,” she added.

Given the bright statistics, the insurance and takaful industry’s prospects look set to remain bright. Nevertheless, major efforts have been made to strengthen the legal framework for the financial sector to further nurture and promote a healthy, long-term growth of the financial services in Malaysia which in­cludes the insurance and takaful industry.

FSA, IFSA: Guidelines for a solid foundation

The enactment of Financial Services Act (FSA) and Islamic Financial Services Act (IFSA) according to BNM’s ‘Stability and Payment Systems Report 2012’, were approved by the Parliament of Malaysia in December 2012, to mark another important mile­stone in modernising Malaysia’s financial system.

While these newly proposed legislations have yet to come into force, according to RHB Research, the legislations were anticipated to be gazetted as early as May 2013.

When enforced, the newly pro­posed financial services acts are expected to resonate across the finance board and well into the insurance and takaful sector.

The research firm further added, the FSA and IFSA would be the latest acts aimed to enforce stricter regulations on group-side risk and capital management on financial serv­ices as well as greater regulatory control over financial areas such as shareholder control and core operations.

In a nutshell, when enforced, the FSA and IFSA will replace six existing statutes, namely the Banking and Financial Institu­tions Act 1989, Exchange Control Act 1953, Insurance Act 1996, Pay­ment Systems Act 2003, Islamic Banking Act 1983 and Takaful Act 1984.

The legislation will also entail the mandatory conversion of composite insurance and takaful operators to single insurance and takaful businesses.

When enforced, the new legis­lation prohibits a licenced insurer or takaful opera­tor (exclud­ing licenced professional rein­surer or retakaful operators) from carrying both life and general businesses. However, licenced life insurers were permitted to carry on health insurance business subject to any requirements or condition as might be specified by the bank, the FSA 2012 stated.

BNM in a report said the purpose of new legislation was to provide a more cohesive and intergrated legal framework that could deliver a consistent and comprehensive treatment of similar risks, thus minimis­ing the prospects for regula­tory arbitrage and gaps, while substantially easing the process of review and updates going forward.

BNM’s governor, Dr Zeti, also said in a keynote address, “A proposed new legislation for our financial sector is now well ad­vanced and will provide a solid foundation for the insurance industry going forward.”

Furthermore, the new leg­islation also seeks to promote greater transparencies and accountability in financial institutions.

With the insurance industry being at the intersection of major regulatory developments aimed to increase solidity and consumer protection, the sector is poised to see sizable trans­formations over the coming years.

BizHive Weekly takes a glimpse on the probable im­pact of the newly proposed rules on the insurance and takaful sector.

Staying steadfast amidst oncoming choppy waters

In a re­cent re­search note by RHB Research Sdn Bhd (RHB Research), the takaful industry was said to be more affected by the newly proposed legislation as the industry has more composite licences issued to takaful play­ers compared to conventional insurers.

BizHive Weekly got in touch with one of the leading takaful players in Malaysia to get its remarks on the current changes in the industry, specifically regarding the newly proposed financial services acts.

“Takaful Malaysia’s business has grown significantly since 2007 with group total assets cur­rently at RM6.4 billion annual growth exceeding 14 per cent and a group profit growth of more than 30 per cent year on year.

“With that in mind, we expect the impact to be at a minimal level and the company has the financial strength and capi­tal to meet the re­quirements of these rules,” Datuk Mo­hamed Hassan Ka­mil, group manag­ing director of Sya­rikat Takaful Malaysia Bhd (Takaful Malaysia) said in an email interview with BizHive Weekly.

Displaying optimism on the newly proposed legislation, he outlined, “Furthermore, under different entity, the general entity will be penetrating the non-life market whereas family entity will infiltrate the family or life market.

“In the long run, this approach should benefit the company and consumers as a whole since the company would be more focused in terms of strategic planning, management, cost control and enhanced customer service. The capital position will also be further strengthened.”

In addition, Hassan highlighted, “We believe that the drafted IFSA is a positive move in relation to the development of the takaful and insurance industry as a whole. The implementation will provide benefits to takaful and in­surance operators including the public and customers in the long run.”

In line with RHB Research’s positive view with regards to the conversion of compos­ite takaful or insurance operators to single takaful or insurance businesses, Hassan opined that the move would pro­mote healthy competition among existing and probable new players, and hence drive the industry’s ac­tive growth.

He elaborated, “Takaful Ma­laysia views this initiative as a positive move in providing further liberalisation towards the industry and we foresee the emergence of fi­nancially strong players due to the possible consolidations in order to meet the capital requirements.”

When asked on what were some of the foreseeable difficulties the industry might face in response to these newly proposed legisla­tion, Hassan noted that talent recruitment would potentially be one of the major problems going forward.

RHB Research affirmed this view as the new legislation might cause many takaful players to split the family and general takaful busi­nesses and hence, intensify the future demand for key talents.

Hassan added, the new legisla­tion would pose difficulties as the takaful industry had long been facing an issue of talent shortage, specifically in professionals techni­cally versed in takaful principles.

“The industry lacks the ‘pulling factor’ to attract the best talent,” he commented further.

Other than the lack of talents could be intensified with the enact­ment of the new leg­islation, Hassan said there was also a possible consolidation amongst industry players taking place in order to meet the capital requirements.

However, he remained optimis­tic by the growing competition as Takaful Malaysia would remain focused on elevating its growth further to increase its market share.

“With solid financial background and as the first takaful operator in Malaysia, with 29 years of experi­ence, Takaful Malaysia is confident in its ability to overcome the chal­lenges and we look forward to the implementation of the new IFSA,” Hassan said, positively.

To note, Takaful Malaysia was first incorporated on November 29, 1984 and commenced its operation on July 22, 1985 prior to its official launching on August 2, 1985 by the then Prime Minister of Malaysia, Tun Dr Mahathir Mohamed.

Takaful Malaysia’s value propo­sition currently lies in its ability to consistently pay the 15 per cent net collectable revenue for its general insurance products which provides a strong capital base to support its future growth.

Hassan also said, “The company is a leading player in the group employee benefit market to offer protection and medical benefits solutions to corporate clients for its employess.”

On the growth of Takaful Malay­sia, Hassan believed that there was more room to grow further and increase its market domi­nance in certain market segments.

When asked on its future plans, Hassan answered that Takaful Malaysia was looking to endorse its ‘We Should Talk’ campaign fol­lowing its launch in April 2012, in order to engage and connect with its potential clients and investors.

“We will be having a campaign to highlight our 15 per cent ‘No Claim Rebate’ as we are the only insurance provider offering such benefit for more than 20 years,” Hassan revealed.

Takaful Malaysia, which cur­rently has 40 per cent market share of the family takaful business, was also set to focus on creating more awareness on our Takaful myGen­Life product.

Additionally, with regards to the lack of talents in the takaful industry, Hassan said, “We are hoping to recruit 2,500 new agents by end of 2013 and to support this initiative, we launched the ‘Be myAgent’ campaign last year to bring awareness to the public on the career and business opportu­nities that Takaful Malaysia has to offer.”

In a long run, Hassan outlined, Takaful Malaysia’s growth aimed to derive from regular-contribu­tion products specifically the family takaful business and invest­ment-linked products.

“Ultimately, our goal is to outpace the market and firmly es­tablish ourselves as the preferred choice not just amongst takaful companies but all conventional insurance providers as well,” he concluded.

Preparing for a better future

For LIAM, a trade association registered under the Societies Act 1966, the proposed FSA and IFSA would impose greater obligations on financial holding companies as well as strengthen the regulation, supervision, and governance of financial services groups.

It added, with the combination of four existing acts (and two existing takaful acts), the implementation of the newly proposed acts would potentially commensurate the impact and the level of non-compliance, including administrative penalties and civil action.

In a long run, LIAM was of opinion that it would have a long term effect on some matters. “For example, the new laws may push affected insurance or takaful players into setting up entities to manage their general insurance and life insurance operations separately in order to retain those businesses.”

Additionally, LIAM said currently, the association was in the process supporting the priming of the industry in response to the newly proposed rules.

“Overall, the FSA and IFSA heighten the need to make operational changes which companies are now working towards.

“As companies are in a period of transformation, LIAM has engaged its law consultants to interpret the clauses in order to be fully compliant when the act comes in full force. Currently, BNM is having engagements with the banking and insurance industry and we have also been invited to submit our views and wish-list to them,” the association commented.

Meanwhile, on the outlook of the insurance industry as a whole, for the year 2013, LIAM envisaged that new business would grow at a rate of about 10 per cent, taking into consideration the projected economic growth rate of about five per cent.

“More insurance companies will roll out annuity products to take advantage of the RM3,000 tax relief made available by the government.

“The medical insurance business will also continue to enjoy high growth rate as the country moves towards a high-income nation.

“Consumers are also increasingly favouring invement-linked policies given its flexibility and possible returns, on top of having protection and savings,” Vincent Kwo, president of LIAM explained in an email interview with the BizHive Weekly.

LIAM further opined that the trend of moving to alternative distribution channels such as banks and direct marketing would continue.

However, agency distribution channels would remain the dominant distribution channel for the next few years.

“Recent structural reforms have transitioned the industry towards more market-based pricing mechanisms in key market segments and it has also improved efficiencies in the insurance eco-system.

“These reforms have also resulted in providing a strengthened framework for consumer protection. Under the Economic Transformation Programme of Malaysia (ETP), the government has set out a target of 75 per cent of the population being insured by 2020.

“The government has also mapped out various initiatives to enhance the role of insurance in the economic development,” LIAM added.

On the other hand, Kwo said, “Life insurance policy is a valuable financial asset that everyone should have. It is time that every family sought professional advice from life companies or from our licenced distributors.

“Everyone should check on their current financial health from registered agents, banks or financial planners with regard to their adequate needs for protection, and retirement savings. And to enjoy low and affordable premiums, one should purchas life insurance at a young age.

“You could even tailor-made the purchase to meet your protection and long term saving goals to ensure monthly or yearly premiums are within your means.”

Overall, the enactment of FSA and IFSA is in line with BNM’s Financial Blueprint 2011 to 2020. BNM’s Financial Blueprint 2011 to 2020 is aimed to modernise Malaysia’s financial sector laws by strengthening the regulations and supervisory environment in the sector, whilst increasing the protection for consumers and preserve a greater level of confidence in the financial system.

In a report by BNM, the evolution of Malaysia’s financial law were also intended to keep pace with the changes in the financial landscape, in a way which would allow financial institutions to tap new opportunities and better manage future challenges, while preserving strong conditions for financial stability.

Fast facts

Key clauses in FSA, IFSA:

Clause 16 prohibits licenced insurer, other than a licenced professional insurer from carrying on both life business and general business. However, licenced life insurers are permitted to carry on health insurance business subject to any requirements or conditions as may be specified by the bank.

Clause 47 seeks to empower the bank to specify prudential stand­ards on an institution for the purposes of promoting the safety and soundness of such institution or the integrity, professionalism and expertise in the conduct of the business, affairs and activities of the institution. The prudential standards may relate to among others, capital adequacy, liquidity, corporate governance, risk management, related party transactions, reserve funds maintenance, insurance funds and prevention of institution from being used, intentionally or unintentionally for criminal activities.

Clause 74 requires licenced insurer to appoint an actuary in respect of its life or general business subject to the prudential standards as may be specified by the bank. The prospective actuary has to meet the requirements or have the qualifications as set out in the stand­ards specified by the bank. Any appointment or reappointment of an actuary by a licensed insurer shall first be approved by the bank for each financial year or other longer period as may be specified by the bank.

Clause 75 seeks to empower the bank to appoint an actuary if a li­cenced insurer fails to appoint an actuary as required under subclause 74 (1) and the remuneration and expenses of the actuary appointed under this clause shall be borne by the licenced insurer.

Clause 129 provides for Schedule 9 to set out the pre-contractual duty of disclosure and representations and the remedies for misrep­resentation relating to contracts of insurance.

Clause 276 provides for a transition period of five years from the time the proposed act comes into operation to enable a licensed insurer which is carrying on both life and general businesses to comply with subclause 16(1) so that the licenced insurer only carries on one of these businesses by the end of the five year period.

Source: Financial Services Act 2012

Clause 30 requires a licenced person to establish a syariah committee to advise on its business, affairs and activities so that they are in compliance with syariah. A financial group may, with the approval of the bank, establish only one syariah committee to serve all Islamic financial institutions within its group.

Clause 287 provides for the requirement for a licenced takaful operator which is currently a private company, to convert into a public company within 12 months of the appointed date.

Source:Islamic Financial Services Act 2012

Making improvements in the system

RHB Research affirmed a positive view of Takaful Malaysia and LIAM on the newly proposed legislation in a research report.

With regards to the impact on the insurance and takaful sector, the research house believed the separation of insurance or taka­ful businesses under different managements might result in stronger and sharper business focus and actually promote in­dustry growth over the longer term as the ruling was intended to clearly distinguish the general and life insurance funds.

In addition, there could be an increase in operating expenses to be incurred in setting up new subsidiaries and hiring separate boards of directors, chief execu­tive officers and other key man­agement positions to operate the new entities as well as a potential increase in demand for actuarial expertise, the research house said, these costs could be spread over the five-year timeframe.

Meanwhile, International Monetary Funds (IMF) in a country report on the financial system stability of Malaysia, commended the Malaysia’s fi­nancial laws.

“The regulatory and super­visory regimes for banking, insurance, and securities are well developed and exhibit a high degree of compliance with international standards,” it reported.

It added the insurance supervision and regulation were also effective, well de­veloped and appropriately focused on relevant activities in the insurance industry.

Shortcomings were mainly on the need to strengthen the regulation of financial guaran­tee business, and to enhance transparency in areas such as licensing and acquisition ap­proval criteria, IMF said.

Moving forward, the RHB Research believed BNM would further enhance the capital adequacy ratio (CAR) require­ments to insurance groups via the provisions in FSA.

“This is a positive move as the current risk-based capital (RBC) framework only considers com­pany-specific risks,” it stated, noting that the move was also catalysed by IMF’s observation in its Country Report on Malay­sia’s insurance sector regarding the current RBC framework which might not adequately address interdependencies be­tween risk categories.

BNM recognised this and might be expected to formu­late more guidelines to fully capture such correla­tion effects in order to prevent sp­illovers and systemic risks.

To note, the industry’s current CAR was levelled at 222.3 per cent (versus 222.5 per cent in 2011), well above BNM’s supervisory target capital level requirement of 130 per cent.

“This was partially sustained by higher retained profits which boosted total capital available. In addition, BNM has made it mandatory for insurance com­panies under its purview to have CAR exceeding the company’s own internal target capital level (ITCL), based on its risk exposure at all times.

“BNM also mentioned that insurance risk remained the largest risk component to the ITCL, comprising of 50.7 per cent of total capital required, while market risk accounted for 30.6 per cent,” the research firm explained.

Meanwhile, RHB Research re­ported that Malaysia’s insurance industry saw a solid rebound in profitability in terms of net income (net underwriting and investment income).

“Based on BNM’s Financial Stability and Pay­ment Systems Report 2012, the life insurance and family takaful sector reported a 38.2 per cent increase in excess income over outgo to RM17.6 billion on the back of premiums and contribu­tions growth of 11.2 per cent.

“The general insurance and takaful sector’s operating profits accelerated by a higher 72.6 per cent to RM2.9 billion, on the back of premiums and contributions growth of 11.1 per cent.

“The general insurance and takaful industry also benefited from a low combined ratio of 96.9 per cent (versus 104.7 per cent in 2011),” it highlighted.

The sector also saw its equities investment increased from 18 per cent of total investment in 2011 to 19 per cent in 2012. The research firm pointed out that equity and interest rate risk col­lectively formed 83.3 per cent of total market risk exposure.

Additional­ly, investment yields among life insurers saw an in­crease of 7.3 per cent in 2012, compared with the historical five-year aver­age of five to six per cent, it noted.

“BNM was con­cerned that the prolonged low interest rate environment may prompt life insurers to hold more capi­tal, which was the case for some global insurers. Future claims exposure could have heightened when insurance funds were left with no choice but to invest in low-yield fixed income securi­ties, thus creating a mismatch when the insurance products were priced under the assump­tion of higher returns.

“Fortunately, the increased total contributions from invest­ment-linked (IL) and other forms of non-participating products which are less capital-intensive, as well as the healthy investment yields helped to limit exposure to interest rate risks,” it stated.

With the insurance industry, including the takaful sec­tor, showcasing solid rebound, the industry should progress signif­icantly over the years.

The possible implementa­tion of the new legislation could pro­vide further support via providing a solid guide­line for the industry and hence pave a way for the indus­try to see a more stable growth.