The Malaysian insurance and takaful sector has a stable outlook, which is supported by steady growth in insurance demand, with capitalisation robust and claims under control, says RAM Ratings.
New business (NB) in the life and family takaful industry grew 4.2% in 2023, driven by the 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.
In RAM’s 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:
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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.
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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.
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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.
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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%).
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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.
Digitalisation
“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,” Ms Lee said.
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 on 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.
RAM expects 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.