Published on 14 Apr 2020.
RAM Ratings maintains a stable outlook on the Malaysian insurance sector for 2020 in conjunction with the release of its commentary – Insurance Insight. The sector is expected to stay resilient despite the considerable economic impact of the Covid-19 pandemic. The strong capitalisation of insurance players is anticipated to sufficiently cushion the impact of heightened financial markets volatility as well as higher capital charges amid low interest rates and mounting credit stress. However, we caution that downside risks remain as there is a high degree of uncertainty over the momentum of the coronavirus’ spread and its ultimate global peak. Our industry outlook may be revised if the extent of the economic impact exceeds our current expectations.
As at end-December 2019, the life insurance and family takaful sectors’ preliminary capital adequacy ratio (CAR) stood at a strong 207% - equivalent to 1.6 times the minimum requirement. Similarly, the general insurance and takaful sectors boasted robust CAR of 283%. Additionally, Bank Negara Malaysia’s sensitivity analysis indicated that the life insurance sector is expected to remain resilient with the industry’s CAR sustaining above the prescribed regulatory level of 130% even under a scenario of 200 bps parallel decline in interest rates.
As part of the government’s economic stimulus package to soften the repercussions of the crisis, life insurance policyholders and family takaful participants will have the option of deferring regular premium payments for three months without affecting their coverage. The financial impact from this relief measure, available from 1 April to 31 December 2020, should be manageable for industry players.
“The mounting risks arising from more volatile financial markets and heightened credit stress amid the economic downturn will affect the insurance industry,” highlights Sophia Lee, RAM’s co-head of Financial Institution Ratings. “However, most insurers have been conservative in their investment strategies, with the bulk of these asset constituting highly rated bonds. The equity portfolios of the top 10 life and general insurers, which account for over 90% and 70% of their respective industries by assets, stood at just 15% and 3% of their respective overall invested asset portfolios as at end-June 2019 (2018: 16% and 4%),” Lee adds.
A protracted low interest rate environment will also put pressure on life insurers’ capital adequacy. Notably, most life insurers in recent years have been selling more investment-linked (IL) products, which pass on investment risks to policyholders and attract lower capital requirements. IL products constituted about 56% of life players’ in-force business in 2019.
The economic implications from the pandemic will cripple the growth of insurance premiums this year, before any rebound can be anticipated in 2021. Based on historical data, new business for the life insurance sector contracted 4.6% during the global financial crisis in 2008, and 10.2% amid the Asian financial crisis in 1998. In 2019, the life insurance industry’s new business premiums expanded 14.2% to RM11.8 bil (2018: +1.8%), driven by stronger sales of IL and endowment policies. Despite near-term growth challenges, RAM expects the life business to be supported by Malaysia’s favourable demographics and healthy demand for medical coverage in the long run, further lifted by significant medical cost inflation.
The contraction of general insurance premiums is expected to be more pronounced in 2020, taking into account the challenging economic conditions and the gradual effects of tariff liberalisation for the motor and fire segments. In 2019, the general insurance industry’s premiums declined 0.8% to RM17.4 bil against growth of 1.8% the year before. Tariff liberalisation for the motor and fire segments, coupled with a high level of motor claims, has been depressing the industry’s underwriting margin which narrowed to 7.1% last year (2018: 8.0%).
Both the life and general insurance industries continue to undergo regulatory reforms. In the life segment, tighter standards were implemented to improve the sales process of life products to mitigate the risks of mis-selling and the liberalisation of commission limits for IL products will preserve the value of the policies and safeguard policyholders’ interest. On the other hand, the phased-in tariff liberalisation in the motor and fire segments of the general insurance industry will continue to promote innovation and risk-based pricing to encourage safe driving behavior in the motor segment.
RAM’s Insurance Insight is available for download at www.ram.com.my.
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Established in 1990, RAM Ratings is a leading credit rating agency registered under the Securities Commission’s Guidelines on Registration of Credit Rating Agencies, 2011. In addition to the provision of credit ratings for corporate bonds and sukuk and their issuers, RAM Ratings also provides research and publications on Islamic finance, fixed income and macro-economic and industry analysis as well as data analytics relating to credit risk, counterparty assessments and other related domains.
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