RAM Ratings has maintained a stable outlook on the Malaysian insurance and takaful sector, which we expect to stay resilient in the face of a changing landscape, market volatilities and the normalisation of claims towards pre-pandemic levels. Notwithstanding headwinds, the sector is still well-capitalised to absorb potential shocks.
Against this landscape, RAM’s key expectations for the sector this year are:
▪ New business (NB) expansion of 8% for the life and family sector (2022: +3% y-o-y; 2021: +18%).
▪ Earnings recovery in the life and family takaful sector as downside risks recede.
▪ Growth in the non-life sector will be flat at best as car sales are anticipated to decline from last year’s all-time high.
▪ Non-life sector’s claims and combined ratios will normalise to pre-pandemic levels.
▪ Capitalisation will remain sound despite still-elevated market risks (capital adequacy ratio as at end-December 2022: 226%; end-December 2021: 224%)
The slower NB growth of the life and family takaful sector is attributable to a pullback in demand for investment-linked products given challenging investment conditions last year and, to some extent, the expiry of the loan repayment moratorium as the resumption of loan instalments reduced the consumption capacity of individuals. We expect NB generation to pick up pace with growth of 8% this year as expansion of the ordinary life/family segment remains strong (2022: +19%), underpinned by an increased awareness of the need for life and health protection as well as the mortgage insurance/takaful business.
Higher claims and payouts of policy benefits, having climbed 13.5% y-o-y (2021: -0.5%; 2020: +0.8%), dented the sector’s underwriting income last year. This was in line with our earlier expectations that medical claims will rise in tandem with a normalisation in the volume of medical procedures to pre-pandemic levels and medical cost inflation. Coupled with outsized investment-related losses, driven primarily by the spike in Malaysian Government Securities yields amid an environment of steep interest rate hikes, the sector’s bottom line sank to a multi-year low of RM8.6 bil (2021: RM12.9 bil; 2020: RM22.3 bil).
“Some earnings recovery is expected this year even though financial markets could still be volatile in view of global uncertainties. Fluctuations should, however, moderate from levels seen last year,” said Sophia Lee, RAM’s Co-head of Financial Institution Ratings.
The claims ratio of the non-life sector also normalised upwards (2022: 57%; 2021: 51%), largely due to increased motor claims. The weaker claims performance and a heavier cost load culminated in a loftier combined ratio of 92% (2021: 87%). “We expect the combined ratio to stay on the higher end of the 85%-95% historical range moving forward, as the claims ratio nudges closer to pre-Covid levels and margins are compressed further amid rife competition,” Lee adds. The non-life sector charted stellar growth of 12% in 2022 (2021: +3.8%; 2020: -0.1%) on account of all-time high car sales – which would unlikely repeat this year – and improved economic conditions. The sector’s growth will be flat at best in 2023.
On a separate note, Malaysian Financial Reporting Standard (MFRS) 17 Insurance Contracts, which outlines new requirements on recognition and measurement of insurance revenue and liabilities, came into effect on 1 January 2023. The complex accounting standard has entailed a major overhaul of processes and systems and will remain burdensome, with players having to maintain two books – one based on the new standard and another on the previous standard for regulatory capital purposes. “However, the profitability of insurance contracts does not change with the new standard although the manner in which revenue and profits are recognised would differ,” said RAM rating specialist Loh Kit Yoong.
The revival of mergers and acquisitions (M&A) activity after a lull may also see shifts in market dynamics, particularly in the non-life industry where there has been some degree of market consolidation after the respective AmGeneral-Liberty and Generali corporate exercises. Following the completion of FWD Group’s acquisition of a 70% stake in Gilbraltar BSN Life and news of potential M&As (Berjaya-MCIS and Tokio Marine’s plan to dispose of Southeast Asian operations) in the last few months, there could be further activity on this front.
The evolving operating landscape with ongoing structural reforms, complex MFRS 17 implementation, and increased M&As mean that players will have to up their game to stay competitive, even while navigating these challenges. The push for digital and more innovative solutions through Bank Negara Malaysia’s (BNM) financial technology sandbox – together with better financial literacy, and efforts to simplify protection products and improve affordability and accessibility – would culminate in higher insurance/takaful penetration in the long run (measured by premiums to GDP; BNM’s Financial Sector Blueprint target of 4.8%-5.0% against RAM’s 2022 estimate of 4.6%).
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.