Rising domestic demand should drive growth in Malaysia’s insurance sector this year, despite economic headwinds, but the highly competitive market could see a further round of mergers as larger operators consolidate their position.
According to a report by the General Insurance Association of Malaysia (PIAM), the general insurance sector is set to record a 5.5%-6% increase in gross written premiums in 2015, roughly equivalent year-on-year from the 5.9% growth to RM17.1bn ($4.7bn) in 2014.
The weaker local currency should help boost domestic consumption, despite global economic headwinds as revenues from oil and other commodities plummet. The government’s plans to maintain development spending should also promote growth, which in turn will see an increase in demand for insurance products, PIAM chairman Chua Seck Guan told media in February.
As in previous years, motor coverage was the dominant policy line in 2014, accounting for 46.4% of all business, though it also continued to be a loss maker, with the industry booking RM163m ($45.2m) worth of red ink on the segment, having paid out RM13.8m ($3.8m) in claims.
The head of the PIAM anticipates that the new goods and services tax (GST) – to be introduced in April − will not have a lasting impact on the sector, though it could slow growth over the next few months. “GST may dampen the sales for a start but we anticipate it will be only short term and it will be back to normal after one quarter … it will not affect the growth of the industry significantly,” he said.
In February, ratings agency Fitch agreed that the outlook for premium growth is relatively strong, underpinned by low penetration rates in many segments, combined with an increasing awareness of the advantages of insurance in Malaysia’s burgeoning urban areas and a rising middle class helping to drive expansion.
The sector is also operating from a position of strength, and would not be affected by the large scale floods that hit five provinces late last year and in early 2015 with losses potentially reaching RM2bn ($551m). “The Malaysian insurance industry maintains a strong level of capitalisation, and existing capital buffers should be sufficient to cushion any losses without having a significant credit impact,” Fitch analyst Thomas Ng said in early February. “Malaysian insurers are protected by a regulatory capital adequacy ratio of about 250% as of end-June 2014, which is almost double the regulatory minimum required of 130%.”
While Malaysia has relatively high levels of life coverage, with around 54% of citizens protected, other non-compulsory penetration is limited. In its 2014 review, PIAM said there was increasing potential for premium growth in the health segment, with more Malaysians seeking medical coverage as they become more affluent, with property and asset coverage also set to expand.
More M&A activity forecast
Despite solid growth forecasts, the number of operators could fall over the next year, with more mergers and acquisitions (M&A) on the cards. Over the past three years, there have been 10 mergers or acquisitions in the industry, and a further shake out is likely.
In a separate report, Fitch said takaful, or Islamic insurance, is particularly open to consolidation, with some smaller operators with weak financial flexibility struggling to meet risk-based capital requirements. “The new regulatory capital treatment is likely to spur some takaful operators to seek alternative funding sources to boost their capital needs,” the ratings agency said mid-December.
Apart from capital requirements, another factor that may spur further M&A is a regulatory requirement, set to come into force in mid-2018. Under the new regulation, both conventional and takaful policy writers will need to split their general and life/family companies under separate licences.
Malaysia’s central bank has been encouraging a trimming of the sector, both in light of the new regulations and the congested state of the industry. Aznan Abdul Aziz, director of financial sector development at Bank Negara Malaysia, said late last year that the number of companies operating in the industry – currently 39 – is too high and participants should look at consolidating.