Published on 23 Apr 2020.
The Malaysian takaful industry will not be spared the impact of the anticipated economic slowdown in 2020 amid the Covid-19 pandemic. Apart from considerably hampered growth this year, takaful operators will also have to grapple with the increased volatility and rising credit risks of their investments. Additionally, a protracted low interest rate environment will strain the capital position of operators if the negative duration gap between assets and liabilities widens. However, the economic impact of the health crisis, while severe, is viewed as temporary and gradual recovery is expected by year-end. Takaful operators’ robust capitalisation is envisaged to help them navigate the crisis. RAM Ratings has maintained a stable outlook on the Malaysian takaful industry for 2020 in conjunction with the release of its commentary, Takaful Insight. We caution that downside risks remain considering the high degree of uncertainty over the momentum of the spread of Covid-19 and its ultimate global peak. We may revise our industry outlook if the extent of the economic impact exceeds our current expectations.
Family takaful new business contributions grew 25% to RM6.2 bil in 2019 (2018: +13%), mainly driven by the MySalam initiative – the national health protection scheme. Excluding MySalam, growth was still commendable at an estimated 16%, anchored by credit-related takaful products and the employee benefit group business. Similarly, the general takaful industry expanded by a strong 20% in 2019, led primarily by the motor business. “That said, given heightened uncertainties and still-evolving challenging macroeconomic conditions, growth in the family and general takaful industry is expected to weaken significantly in 2020,” said Sophia Lee, RAM’s co-head of Financial Institution Ratings. During the global financial crisis in 2008, family takaful new business growth was a slower 10% compared to 33% the previous year.
While family takaful profit more than doubled to RM3.8 bil in 2019 – supported by improved contributions and a better investment performance – we foresee the industry’s profitability in 2020 to be softer in view of a subdued top line and downside pressure on investment income owing to volatile capital market movements in recent months. Likewise, the profitability of the general takaful business is expected to be strained in the tough economic environment as the segment has seen thin net underwriting margins (2019: 1.5%). Nonetheless, the industry’s investment income should be able to counter some of the profitability pressures as the segment has limited exposure to the equities market and may record some gains from its fixed income portfolio, considering further OPR cuts anticipated for the rest of 2020. The recent spike in Malaysian Government Securities yields despite twin OPR cuts in 1Q 2020 was likely a knee-jerk reaction triggered by investors shifting investments to safe-haven assets amid the crisis and should retreat on account of further monetary policy easing.
Despite the headwinds, the strong capitalisation levels of both the family and general takaful industries should be able to buttress the impact of the interim adversity. Based on latest available data, the industries’ capital adequacy ratios were sturdy at 194% and 293%, respectively as at end-June 2019 – comfortably above the minimum regulatory requirement of 130%. Bank Negara Malaysia’s (BNM) sensitivity analysis further indicates that the life insurance sector will stay resilient, with the industry’s capital adequacy ratio sustaining above the required 130% even in a scenario where interest rates register a 200-bp parallel decline. BNM had also recently reduced the interest/profit rate stress factor caps applied under the capital framework for insurers/takaful operators from 40% to 30% with effect from 31 March 2020, relieving some pressure from the low interest rate environment.
RAM’s Takaful Insight is available for download at www.ram.com.my.
Hafiz Abdul Aziz
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