Under Cover Operations
The consensus seems to be that for the insurance industry being a known quantity no longer cuts it regarding performance. EY suggested earlier in 2016 that Asia Pacific insurers prepare for strategic change by expediting the shift to online and mobile access, fostering greater synergy with the broader health market and examining the options for M&As to curb operation costs.
Malaysia’s financial universe is marked by regulation and the positive effects of reform that both curb irregularity and stimulate innovation. The local financial workforce, too, is highly skilled, essential as insurers and banks evolve from product to service providers, where ultimately, competition will take place on service offering, rather than price. Tomorrow, too, a well-rounded workforce will result in more reinsurance retained domestically. The recent flurry of changes among key insurers’ senior management confirms thus, that the talent pool is key to the premium pool. A PwC report from 2015 indicated that while financial services in general were seeing febrile talent-hunting activity, this was notably the case in Singapore’s insurance industry.
A key factor hampering the local insurance industry, along with others in 2016, has been ringgit depreciation, where notably the decline in auto purchases has had a concomitant effect on that branch. Likewise, the dent sustained by trade due to global headwinds has been reflected in shrinkage of marine cargo insurance, made worse by stiff competition as numerous players seek a place in what is, in better times, a profitable branch to swing from. Other global, notable among which are persistent uncertainty over post-Brexit Britain and the policies of the upcoming Trump administration across the pond also take their toll.
And as official entities inculcate a public grasp of investment and coverage, this ongoing process is backed by strategic reforms that will likely redraw the insurance landscape through consolidation.
The precedent for the latter was set with the 2005 merger of several firms, including Takaful Maybank and Maybank Insurance, renamed Etiqa. This major player in the takaful arena posted total company assets of MYR13.9 billion, where the shareholders’ fund, general takaful fund, and family takaful funds had total assets of MYR2.5 billion, MYR2 billion, and MYR9.5 billion. Malaysia is, of course, a global center of sharia-compliant financial services, the extent to which was stressed by Sandeep Singh, Country Head-Malaysia & CEO, and Head of Islamic Business at Franklin Templeton GSC Asset Management. In a TBY interview he revealed that, “In the insurance industry, about 7-8% of the market is takaful, and in the fund industry, about 20% of the assets are sharia-compliant.” A glance at this market reveals that as at end-2015 there were 11 direct takaful operators, down from 12 in 2012. Net Contributions Income of MYR6.8 billion had risen YoY from MYR6.2 billion, while for the period net benefits and claims payments had climbed to MYR3.2 billion YoY from 2.7 billion. And meanwhile, total takaful assets for 2015 stood at 24.7 billion, spilt into MYR21.4 billion and MYR3.3 billion respectively for the family and general branches.
For 3Q2016, in the insurance and takaful sector combined, an improved claims ratio, notably in the motor branch, improved operating profit to MYR886.7 million (2Q2016: MYR809.6 million) among general insurers and takaful entities. Meanwhile, the life insurers and family takaful operators saw the tailwinds of funds invested in a bond market of higher valuation.
Laissez Faire Wins the Day
The sector has been exposed market forces, with liberalization ending the system of long-standing tariffs unifying the prices insurers may charge, better known as “detariffication” of the industry. The principal effects of removing tariffs on automotive and fire insurance will be increased competition among insurers, greater product differentiation and the emergence of new customer segments, again, turning away from irrational price competition. Malaysia, moreover, has observed how not to do this by watching similar events in China. There, prolonged price wars provoked the reintroduction of price controls to bring the market to its senses.
Life as We Know It
According to the ASEAN Insurance Council (AIC) 2016 ASEAN Insurance Statistical Report, total gross written premiums for the ASEAN region rose by 2.9% for 2015, to USD96.3 million. Overall insurance penetration also climbed by a slender 0.4% to 3.8% YoY. Of note, the region printed USD68.7 million in net written premiums in the life insurance segment on a 3.9% YoY rise, where Malaysia, Singapore, and Thailand loomed large. In 1Q2016 the Life Insurance Association of Malaysia (LIAM) concluded that a full 90% life-insurance covered citizens remained under insured. Add to that the reality of health sector annual inflation of between 15 and 20% and the reality of an ageing population underlines the need for coverage. Official data for 2015 confirmed that while 50% (12.5 million) of the population had coverage, for 90% it amounted to just one or two times their annual income. This starkly contrasts with the recommended 10x, especially for the family breadwinner. Further evidence comes from the Credit Counseling and Debt Management Agency’s (AKPK) debt management program, where it appears that high medical costs result in 14.3% of participants defaulting on their debts. Insurance sector regulator, the central bank, Bank Negara Malaysia (BNM), targets 75% penetration on an adequate footing by 2020. Confident in the power of incentives, LIAM has also lobbied for special tax relief for Employees Provident Fund (EPF) contributions, and tax deduction for life insurance premiums. as currently MYR6,000 tax relief on combined EPF and life insurance premiums is available to the public. The life insurance segment posted 6.2% growth to MYR1.24 trillion in 2015, vs. MYR1.17 trillion in 2014. Life insurance penetration in Malaysia also rose YoY from 41% to 56%. It seems set for modest single-digit growth in 2016. In Malaysia’s highly concentrated life segment the five biggest insurers together held over 65% of the segment’s gross written premium as at 2014. Fast-forward to 9M2016, and we note that new individual policies written exceeded 1 million on a 2.1% YoY rise. We note, too, 18.3% YoY growth in new business-weighted premium (100% of regular premiums plus 10% of single premiums) to MYR3.68 billion. Traditional life business, up 27% outpaced investment-linked business, which nonetheless rose by a healthy 12%.
According to LIAM, the gross figure for all new individual policies combined reached RM82 billion, strongly up YoY from MYR68 billion. Investment-linked business grew faster in terms of gross sum assured compared with traditional life insurance with growth rates of 24.7% and 7.2% respectively. For 9M2016, the life insurance segment paid out 7.7% greater claims YoY, in benefit payments for death, disability, medical, bonuses, and others, which summed up to MYR7.11 billion. Regarding new business mix, investment-linked business maintains its superiority over traditional life business, contributing 54.9% of the new business weighted premiums with 45.1% stemming from the traditional component. This area of the sector has also benefitted from transformation since implementation of the LIFE Insurance and Family Takaful Framework as of 23 November 2015. The framework has provided greater customer access to data on their insurers, fine tuning transparency. Other legislation improving the landscape have featured the Risk-Based Capital Framework for Insurers, which came into force in 2009, and Financial Services Act and Islamic Financial Services Act, both arriving four years later.
Looking ahead, given the right macroeconomic climate, central bank, and sector educational efforts, the Life Insurance and Family Takaful Framework (LIFE Framework) of late 2015 will spur growth toward the officially targeted 75% penetration rate.