Published on 26 Apr 2021.
RAM Ratings maintains a stable outlook on the Malaysian insurance and takaful industry. “Covid-19 outbreak and the imposition of Movement Control Order (MCO) have been detrimental to the performances of insurers and takaful operators in 2020. However, the overall impact was still manageable, courtesy of the strong rebound in the second half of the year as restrictions eased and industry players adapted to the new operating norm,” highlights Sophia Lee, RAM’s Co-Head of Financial Institution Ratings, in conjunction with the release of RAM’s latest commentary on the sector titled Insurance and Takaful Insight: Silver linings emerging, but worst is not over. “We believe the insurance and takaful industry will overcome the economic adversities of the pandemic. The extent of the industry’s recovery in 2021, especially with respect to premiums growth and profitability, will largely correlate with that of the overall economy, which in turn depends on the levels of infection and the pace of nationwide vaccinations,” Lee adds.
New business (NB) premiums in the life insurance sector contracted by only 3% to RM11.4 bil in 2020 (2019: +14%) as the strong rebound in 2H 2020 (+7% y-o-y) partly mitigated the sluggish sales in the first six months (-13% y-o-y). The rebound over the last six months was driven by healthy demand for investment-linked (IL) policies, in line with the growth trend of the past few years. Life insurers are increasingly tilting towards IL policies as investment risks of these products are borne by policyholders, which reduces the capital requirements of players. Fuelled by sustained demand for IL policies as well as the uptick in mortgage insurance contracts (due to the impetus from the extended Home Ownership Campaign), we forecast NB growth of 3%-5% for the life insurance sector in 2021.
The life insurance industry’s return on assets (ROA) slipped to 7.0% (2019: 8.4%) in 2020, mainly due to falling yields on Malaysian Government Securities (MGS) during the year. While decline in yields led to higher valuation gains for the insurers’ fixed income portfolio, it inflated the provisioning on their actuarial obligations. Adverse stock price movements have also triggered losses on players’ equity investments, although some paper losses have been recouped with the recovery of stock prices since November 2020. Better premiums growth and a more stabilised actuarial provisioning will support earnings of life insurers in 2021. However, spike in market volatilities and protracted period of low bond returns could affect their investment yields. As such, we expect a flattish or slightly higher ROA for the industry.
Gross premiums of the general insurance sector slipped to RM17.2 bil in 2020 (2019: RM17.4 bil). Premiums from motor policies and fire coverages (jointly contributing 69% of the sector’s aggregate) experienced respective 0.2% contraction and 1.6% growth. Overall these performances were better than expected, considering the pandemic and suboptimal growth trends since the start of de-tariffication in 2016. Due to the health crisis, second phase of de-tariffication that was meant to be introduced in 2020 has been shelved. The profitability of general operators in 2021 might be affected by pressure on investment yields and possible underwriting margin correction. Underwriting margin was a higher 10% in 2020 (2019: 7%) as a result of the anomalously lower claims ratio following the imposition of MCO.
As for the takaful sector, family takaful NB contributions were similarly affected by the economic ramifications of Covid-19, growing slower at 7% in 2020 (2019: +17% (excluding MySalam contributions)). For 2021, NB growth could rebound to 10%-12%, driven by the recovery of mortgage takaful contracts. Meanwhile, general takaful contributions grew at a subdued 5% to RM3.5 bil in 2020 (2019: +20%), mainly due to the 12% decline in car sales which affected demand for motor polices. However, an uptick in vehicle sales in 2021 will likely invigorate general takaful growth in the ballpark of 6%-8%.
Looking ahead, the insurance and takaful industry’s capitalisation will stay sound in face of the economic challenges. As at end-December 2020, the life insurance and family takaful sector recorded a preliminary capital adequacy ratio (CAR) of 203.5% while the general insurance and takaful industry’s CAR was a solid 282.6%. (end-December 2019: 206.2%%, 279.8%)
(603) 3385 2495
Hafiz Abdul Aziz
(603) 3385 2534
(603) 3385 2577
The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.
RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.
Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.
Published by RAM Rating Services Berhad
© Copyright 2021 by RAM Rating Services Berhad