Insurance and Takaful sector to remain resilient against headwinds

The insurance and takaful sector is expected to remain resilient despite volatilities on the investment front and the normalisation of claims experience on the road to endemicity, according to RAM Ratings co-head of financial institution ratings Sophia Lee.

Based on RAM’s latest commentary Insurance and Takaful Insight: Raising the Game, which detailed key expectations for the sector, new business growth in the life and family takaful segments are expected to come in at 10% and 20% respectively, in 2022 (2021: +12% and +29%) as the sector rides the recovery wave. The claims experience of general insurance and takaful players is also anticipated to normalise upward. Capitalisation will remain sturdy, staying adequate against downside risks.

However, the profitability of life and family takaful players will stay pressured by uncertainties on the external front; while competition in the motor and fire segments will intensify, with further liberalisation still on the horizon.

RAM Ratings, which maintained a stable outlook on the Malaysian insurance and takaful sector, explained that the new business generation for the life and family sector rebounded strongly in 2021 after having been subdued by the pandemic in 2020 (mostly in Q2). Investment-linked plans continued to be the main growth driver in terms of new business premiums and contributions, although the number of new ordinary life/family policies spiked. The increase mainly stemmed from the take-up of Perlindungan Tenang policies by individuals in the B40 income group who received RM50 vouchers from the government for the purpose (1.71 million vouchers redeemed amounting to RM85.4 million in premium/contribution value). However, as these are generally smaller-ticket policies, it only contributed 0.4% to aggregate new business premiums and contributions in 2021.

Despite the turnaround in new business growth, unfavourable investment valuations and some cost pressures weakened the life and family sector’s profit performance. Excess of income over the outgo, a proxy of the sector’s bottom line, almost halved to RM13.1 billion in 2021 (2020: RM22.3 billion), due mainly to domestic equity valuations which were dampened at the close of 2021 due to the emergence of the Omicron variant, as well as revaluation losses on insurers’ bond portfolios given higher Malaysian government securities yields. The latter largely resulted from the expectation that interest rates would rise in tandem with economic recovery.

“Going forward, external uncertainties including but not limited to the Russia-Ukraine war and the pace of interest rate normalisation in advanced economies, could heighten volatilities in financial markets. These will exert pressure on the bottom lines of life insurers in 2022, even with our new business growth expectation and in-force business holding its ground,” said Lee in a statement today.

The general insurance and takaful sector’s underwriting performance improved for the second year straight in 2021. Better claims experience, largely from motor covers because of reduced road activity, lifted the underwriting margin of general players to 13% (2020: 10%; 2019: 6%).

The improvement would have been more significant if not for higher flood-related claims seen in December. The estimated gross insured loss of around RM2.2 billion, at a third of the aggregate RM6.1 billion of economic losses is telling of the fact that many homes and vehicles in Malaysia are uninsured or underinsured.

“Greater awareness of the availability of flood and special perils (natural disaster) cover among households and businesses, particularly small medium enterprises, could shield them from the sudden impact of such events and help safeguard financial wellbeing,” Lee highlighted.

The fire class remained the second-largest segment for general players after motor (20% and 50% of aggregate premiums and contributions in 2021, respectively), supporting the overall 4% growth in the non-life sector’s premiums and contributions to RM21.5 billion last year (2020: flattish; 2019: +2%). Additionally, the adoption of Malaysian Financial Reporting Standard 17 Insurance Contracts in 2023 which requires insurers to recognise profits only as they deliver insurance services/coverage (versus when premiums are received upfront) will have a greater effect on life and family players given their longer-term contracts.

Further liberalisation of motor and fire tariffs is likely to spur greater innovation and competition in the segments. Reforms such as those to contain medical costs and claims inflation, while likely to yield benefits only in the long run, are definitely steps in the right direction, the agency said.

Industry players will also have to adapt to the changing landscape as the sector gears up to raise its game amid digitalisation accelerated by the pandemic, the impending entry of digital insurers and takaful operators, and regulatory push for structural reforms to drive greater industry dynamism, inclusivity and sustainability.

Source: The Sun Daily