RAM Ratings pegs stable outlook on Malaysia’s insurance and takaful sector


KUCHING: Despite the evolving landscape brought on by the recent regulatory developments, RAM Ratings Services Bhd (RAM Ratings) pegs a stable outlook on the insurance and takaful sector, premised on the respective segments’ favourable growth prospects, the insurers’ strong capitalisation levels and a stable regulatory framework.

In a recently published commentary, the ratings agency said as at end-December 2013, the insurance sector’s consolidated risk-based capital-adequacy ratio stood at 245.9 per cent, affording a comfortable buffer to meet its liabilities.

It also noted that Malaysia is largely spared from natural catastrophes.

“We believe that the consensus medium-term forecast of seven to 10 per cent growth for general and life insurance (and double-digit growth for takaful) is largely achievable.

“Meanwhile, any price war arising from detariffication is not expected to last while the industry adjusts to a new pricing structure,” it opined.

In its commentary, RAM Ratings said, Malaysia’s insurance and takaful sector has evolved significantly in the last five years.

“The liberalisation of the Malaysian financial sector in 2009 – which allowed higher foreign equity (from 49 per cent to 70 per cent) in investment banks, Islamic banks and insurance/takaful companies and the issuance of additional licences – paved the way for greater foreign participation in local insurance


“At the same time, Bank Negara Malaysia (BNM) introduced a host of regulatory changes – starting with a new risk-based capital framework for conventional insurers in 2009 (and for takaful operators in 2014) plus various other operating guidelines for both general and life insurance/family takaful businesses to enhance the industry’s financial soundness, efficiency and consumer protection,” it explained.

It added, the financial sector had previously been governed by separate legislatures until June 2013, when these laws were amalgamated into a single legislative framework, which are the Financial Services Act 2013 (FSA) and the Islamic Financial Services Act 2013 (IFSA).




“Under the new Acts, composite insurers and takaful operators (TOs) are required to legally separate their general and life/family businesses by 2018.

“While this would strengthen regulatory oversight of the sector, the additional capital and resource requirements could be significant for smaller players,” it said.

Meanwhile, tariff deregulation for the motor sector – the largest general business segment in Malaysia – is expected to come into effect in 2016 (fire tariffs could also be deregulated in the near future), it added.

RAM Ratings pointed out, “All these developments, starting with the sector’s liberalisation, have sparked a wave of mergers and acquisitions (M&As) in the insurance industry, thus paving the way for greater competition, if not more challenging times ahead, for the incumbents.

“Large established companies with strong balance sheets, good product innovation, risk-management expertise and extensive distribution channels will enjoy a competitive edge over their peers, although smaller insurers/TOs may still be able to thrive in niche segments with the right business model and know-how.”

Between 2010 and June 2014, it said the Malaysian insurance industry saw the conclusion of 17 M&A deals valued at about RM15 billion, notably in the more fragmented general insurance segment.

“Increasingly, these M&As have involved large established foreign partners, with a few debutantes in the Malaysian market.

Faced with anaemic growth and mature markets in their home countries, foreign insurers are attracted to the growth potential of emerging Asia, where the insurance sector is still relatively under-penetrated.

In the last decade, total premiums in emerging Asia have increased 10 per cent per annum for the life business and 13 per cent for non-life. The penetration rate for life insurance (as a percentage of gross domestic product) of these emerging economies averages at only two per cent, in contrast to about eight per cent for some developed economies in the region, RAM Ratings noted.

In Malaysia, it said both the general and life segments have enjoyed strong growth – life insurance premiums posted a five-year compounded annual growth rate (CAGR) of six per cent, with eight per cent for general insurance premiums.

“These growth rates are forecast to hold steady over the medium term.

“Posited against the country’s life penetration rate of 3.3 per cent (of gross domestic product), a young insurable population and rising consumer awareness as well as a stable regulatory regime, Malaysia is an attractive proposition for foreign insurers.

“The average valuation paid comes up to about 2.3 times book value, although insurers with exclusive bancassurance arrangements or sizeable market shares have transacted at higher premiums, which are closer to three times book value, in recent years,” it said.

Moving forward, it viewed the industry’s consolidation and the entry of global players will not only result in larger and stronger insurers, but also greater sophistication for the domestic industry – through product innovation, pricing and risk management expertise as well as multi-channel – including digital – distribution.

“In turn, consumers will benefit from better access to more product choices that suit their individual needs,” it concluded.