Participating life insurance policies have seen a significant decline in their share of net premium in the life insurance and family takaful sector in Malaysia in recent years, according to an article in the "Financial Stability Review 1st Half 2024" publication released by the central bank, Bank Negara Malaysia (BNM).
The article notes that there has been a prolonged reduction in participating life insurance new business premiums, coupled with lower renewal premiums arising from the termination and maturity of participating life insurance policies over time.
|
Type of insurance plan
|
2005-15 average
|
2016-23 average
|
|
Participating
|
39%
|
19%
|
|
Non-participating
|
21%
|
19%
|
|
Ordinary takaful
|
9%
|
13%
|
|
Investment linked
|
30%
|
48%
|
|
Annual participating new business premium
|
MYR1.3bn
|
MYR0.6bn
|
Source: BNM
Factors driving decline
The trend of declining participating life insurance policies is not unique to Malaysia. Some markets in Asia and Europe are also facing similar situations. Several common challenges faced by insurers across Asia include the historically prolonged low-interest rate environment that has put pressure on investment returns, stronger regulatory requirements including changes to risk-based capital frameworks, and the availability of more attractive alternative policy offerings.
In a survey conducted by Bank Negara Malaysia (BNM), more than half of the insurers surveyed cited the shift in consumer preferences towards insurance policies that provide greater protection against life uncertainties as a key contributing factor to the decline of participating life insurance policies. This preference partly reflects the heightened awareness and demand among Malaysians for financial protection to meet medical and health expenses, which are typically not covered under participating life insurance policies.
Participating life insurance policies generally provide coverage for events such as death or total and permanent disability, which may not align with the current preferences of potential policyholders who are looking for coverage that addresses a broader range of financial needs.
Participating life insurance policies are also perceived to be less flexible compared to other life insurance policies. They typically have fixed premiums, with a guaranteed minimum coverage that is pre-determined at inception. In contrast, other life insurance policies such as investment-linked (IL) policies allow policyholders to make partial withdrawals or additional payments to their unit fund corresponding to their financial circumstances, as well as to choose and switch unit fund investments according to their risk tolerance and financial objectives.
Furthermore, participating life insurance policies may be more difficult for policyholders to fully understand or appreciate due to the way in which profits are shared with policyholders. For example, the actual investment performance of a participating life insurance fund is not directly reflected in the declared bonuses due to smoothing practices. This contrasts with IL policies, where the return from an IL fund is directly reflected in the unit fund’s value, with investment risks fully borne by the policyholders.
From the supply perspective, life insurers face heightened challenges in meeting expected investment returns of insurance funds in an uncertain macroeconomic environment. Life insurers are also factoring in enhanced regulatory requirements in their long-term strategies for participating life insurance business. These considerations have seen some insurers gradually scale back their offering of participating life insurance policies.
Impact on the insurance sector
The longer-term decline in new participating life insurance business has led to a persistent trend of underwriting losses recorded for participating life insurance funds.
However, the financial impact on the sector remains limited. Excluding the participating life insurance funds, the sector continues to record positive net underwriting performance, driven by other life insurance policies. Overall, total new business premium, including savings-based policies, continues to experience positive growth. This is supported by the sustained growth in alternative insurance policies, reflecting strong substitution effects associated with new business premiums shifting from participating policies to IL and non-participating policies. Such effects have continued to support overall earnings performance.
Despite the shrinking participating life insurance funds, life insurers have allocated sufficient reserves to fund payouts for participating life insurance policies. Guaranteed benefits for policyholders are well covered by ample buffers, with a coverage ratio of 166% in June 2024. As of June 2024, the total surplus arising from participating life insurance funds remained positive at MYR2.4bn ($568m), adding to the overall capital buffers of insurers and takaful operators.
Outlook
Insights from the BNM survey indicate that growth in new participating life insurance business will likely remain low in the foreseeable future. For some insurers, the persistent decline of participating life insurance funds could reduce economies of scale for risk and expense pooling to an unsustainable level.