Well-capitalised insurers & takaful operators steadfast amid uncertainty, eye digital innovation for growth

Published on 05 Aug 2024.

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RAM Ratings has a stable outlook on the Malaysian insurance and takaful sector, which is supported by steady growth in insurance demand, with capitalisation robust and claims under control. 

New business (NB) in the life and family takaful industry grew 4.2% in 2023, driven by recovery in demand for investment-linked products as financial markets rebounded. The non-life sector charted a 9.4% growth, driven by sales tax exemption for cars which lifted motor premiums (its largest segment). However, earnings of both sectors before factoring in investment income were at multi-year lows, strained by higher claims and operating costs. Highlighting RAM’s expectations in its latest commentary Insurance and Takaful Insight, Sophia Lee, RAM’s Co-head of Financial Institution Ratings said, “We foresee slower growth in both the life/family takaful and non-life sectors in 2024, due to inflationary pressures. The sector is however well-capitalised to absorb some margin compression and potential shocks”.  

Key highlights of the commentary:

• Slower y-o-y NB expansion of 3.5%-4.0% in 2024 in the life and family sector (2023: +4.2%) as consumers face rising costs and brace for the eventual reduction of RON95 petrol subsidies. Policy surrenders and forfeitures have already crept up. 
• Surging medical claims have crimped earnings of life insurers and family takaful operators, triggering repricing exercises that could impact affordability. To encourage more responsible healthcare usage, BNM now requires all insurers and takaful operators to include cost-sharing provisions in new individual medical and health products. This could partially stem medical inflation though we view this to happen over the longer term.
• General insurance and takaful sector premiums will grow by a slower 5% this year (2023: +9.4%) as car sales are expected to ease. Margins are at their thinnest in a decade and will remain compressed amid intense competition.
• Capitalisation will stay strong as sufficient buffers are in place to withstand potential shocks. Industry capital adequacy ratios as at end-December 2023 were over 200% (required minimum: 130%).
• Digitalisation efforts by existing industry players and upcoming digital insurers and takaful operators (DITOs) will help enhance customer experience and move insurance penetration closer to the central bank’s target of 4.8-5.0% of GDP.

“Bank Negara Malaysia’s (BNM) recently launched licensing and regulatory framework for DITOs will promote greater innovation within the industry and help narrow the protection gap especially among the underserved segments,” Lee observed. Encouraged to adopt new and emerging technology-based solutions, licensees will have to advance three core areas – inclusion, competition and efficiency. The application period for licences will run from January 2025 to December 2026 and unlike the case with digital banks, no limit was set for the number of DITO licences to be awarded. The entry of DITOs in the medium term would also intensify competition though they will complement existing players in targeting the underinsured and uninsured.

Financial market volatility will continue to be a key factor influencing returns of insurance and takaful operators, particularly those in the life/family takaful sector given substantial investment assets held. Better investment returns lifted sector earnings in 2023 following outsized losses seen the previous year.

We expect family takaful to continue to make up between 40% and 50% of NB premiums especially as the Islamic banking sector continues to outpace its conventional counterpart in line with the Islamic first strategy adopted by various banks. Notwithstanding weaker NB generation in 2023, family takaful accounted for 42% of total NB premiums/contributions, exceeding the approximate 30% registered a decade ago. 

RAM’s Insurance and Takaful Insight: Steering through Uncertain Times can be downloaded at www.ram.com.my.

 

Analytical contacts
Lee Yee Von
(603) 3385 2503
yeevon@ram.com.my

Sophia Lee
(603) 3385 2619
sophia@ram.com.my

Media contact
Sakinah Arifin
(603) 3385 2500
sakinah@ram.com.my

 

About RAM Rating Services Berhad (RAM Ratings)

Established in 1990, RAM Ratings is a leading credit rating agency registered under the Securities Commission’s Guidelines on Credit Rating Agencies. 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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