The Malaysian insurance industry is among the fastest emerging markets of the

Transcription

1 BEST S SPECIAL REPORT Our Insight, Your Advantage. Segment Review December 16, 213 Malaysia provides a stable, competitive environment. Economic Growth, Regulatory Development Create Attractive Market in Malaysia The Malaysian insurance industry is among the fastest emerging markets of the global insurance industry; its stable economic growth and well-developed regulatory framework have drawn the attention of international insurers. With the proposed Financial Services Act 213 and Islamic Financial Services Act 213 effective this past June, the implementation of the Internal Capital Adequacy Assessment Process (ICAAP) and the liberalization of the insurance sector, Malaysia provides a competitive operating environment with financial stability and a well-framed regulatory system for the finance and insurance sectors. Malaysia s economy has recovered strongly since 29, with real gross domestic product (GDP) expanding by 5.6% in 212 after growing 5.1% in 211. Domestic demand, consumption and investment are expected to remain strong, and growth is forecast to be 4.4% for 213. Compared with other Southeast Asian countries, Malaysia has a relatively higher limit on foreign ownership, which allows foreign investors to buy as much as 7% of domestic insurers. The regulator, Bank Negara Malaysia (BNM), has encouraged mergers and acquisitions in this fragmented industry, leading to a decline in the number of conventional insurers to 35 in 212 from 44 in 22. The opportunity for growth in Malaysia has attracted regional insurers to the local business. Notable recent mergers and acquisitions Exhibit 1 Conventional Market Share by Line (212) Based on gross premiums written. Miscellaneous 5% Marine, Aviation & Transit 1% Personal Accident & Medical 14% Engineering & Contractors' All Risks 4% Fire 16% Liability 3% Workers' Comp & Employers Liability 1% include AIA Group Ltd. s purchase of ING s Malaysian insurance business and the acquisition of MUI Continental Insurance Bhd by Tokio Marine Holdings Inc. Motor 47% Analytical Contact Jeff Yeung, Hong Kong Jeff.Yeung@ambest.com Editorial Management Brendan Noonan, Oldwick The major lines of business in the general or non-life insurance sector for both conventional and Takaful insurance remain motor, fire, and personal accident and medical. In 212, motor represented 47% of the gross premium written (GPW) for conventional insurers and 59% for Takaful insurers. Fire and personal accident and medical contributed 3% of total GPW for conventional insurers and 27% for Takaful insurers. Other lines for conventional insurers include marine, aviation and transit (1%), engineering (4%) and liability (3%). Copyright 213 by A.M. Best Company, Inc. ALL RIGHTS RESERVED. No part of this report or document may be distributed in any electronic form or by any means, or stored in a database or retrieval system, without the prior written permission of the A.M. Best Company. For additional details, refer to our Terms of Use available at the A.M. Best Company website:

2 The composition of general insurers funds has remained stable over the past five years, with the majority of assets held in debt securities. In 212, private debt securities and Malaysian government securities accounted for 25% and 2% of general insurers funds respectively. The remainder are cash and deposits (25%); other investments and assets (2%); amounts due to clients (7%); property, plant and equipment (2%); and loans, investment properties and foreign assets (1%). Between 28 and 212, GPW in Malaysia s conventional general insurance market increased by an average of 7.8% annually. In 212, Malaysian general insurance recorded total GPW of MYR 14,678.8 million, up 8% from MYR 13,64.9 million in 211. The Malaysian general insurance market is expected to maintain strong growth in the next couple of years, and intense competition will continue in both direct and reinsurance markets. Exhibit 2 Takaful Market Share By Line (212) Based on gross premiums written. Marine, Aviation & Transit 5% Personal Accident & Medical 8% Fire 19% Miscellaneous 6% Engineering & Constractors' All Risks 3% Motor 59% At year end 212, the Malaysian general insurance sector reported an underwriting profit of MYR 1,399 million. Favorable results in the past five years were driven by improving underwriting performance across most lines of business. In 212, the industry combined ratio dropped to 86.5% from 97.4% in 28, primarily due to the industry s efforts to tighten underwriting policies and claims management. Specifically, the net claim ratio of Motor Act business improved somewhat to 242% in 212 from 31% in 211. This ratio is expected to reduce further as the New Motor Cover Framework, which took effect in January 212, introduced premium adjustments across all vehicle types and paved the way for eventual de-tariffing of motor insurance premiums in 216. According to BNM, the industry s risk management continued to improve. By 212, the capital adequacy ratio for the whole insurance industry was adequate at 222.3%, compared with 221.5% in 211 and well above the supervisory minimum requirement of 13%. Financial Service Act 213 and Islamic Financial Service Act 213 With the Financial Service Act 213 and Islamic Financial Service Act 213 taking effect June 3, the regulatory and supervisory framework for the financial services sector in Malaysia has entered a new era. The introduction of the two new acts is expected to provide a uniform legislative framework to govern all financial sectors in the country, including both conventional and Islamic. The most significant change to the insurance industry is that composite insurers and Takaful operators no longer are allowed to carry on both life insurance/family Takaful business and general insurance/general Takaful business. The only exemptions to this 2

3 new requirement are licensed professional reinsurers and retakaful operators. Also, insurers are given a period of five years before the new rule is enforced. The separation of general insurance and life insurance licenses will benefit the long-term health of the Malaysian insurance industry. On one hand, it prevents composite insurers from filling the short-term cash flow shortage arising from general insurance claims with the long-term investment fund from life insurance business. On the other hand, the separation will enhance operational efficiency in the longer run, as operations can be more focused in terms of strategic management, product design, customer service, etc. In the near term, the separation might increase operational costs, as more resources and personnel will be needed up front. However, given its long-term benefits, the proposed separation is still considered positive to the Malaysian insurance industry, and insurance companies as well as policyholders will benefit in the end. The new act is also expected to drive mergers and acquisitions in the market. Larger composite players are likely to have sufficient funds to secure both general and life insurance licenses. However, some smaller composite insurers might have trouble meeting the capital requirements for both entities. They might then choose to retain only one license and dispose of the other sector of business, thus heating up consolidation activity again. Exhibit 3 Conventional Gross Premium & Takaful Gross Contributions (28-212) Premiums & Contributions (MYR Millions) 16, 14, 12, 1, 8, 6, 4, 2, Non-Life Conventional Non-Life Takaful Gross Premium Gross Contributions Non-Life Conventional Growth (%) Non-Life Takaful Growth (%) Exhibit 4 Conventional Net Incurred Claims & Combined Ratios (28-212) (%) Net Incurred Claims Ratio Commissions Ratio Management Expense Ratio Combined Ratio Growth (%) As there are more Takaful operators than conventional insurers with composite licenses (eight composite Takaful operators vs. six composite conventional insurers at year end 212), the new act is likely to have a bigger impact on Takaful operators than on conventional insurers. However, the new rule will not apply to the four family Takaful companies that secured their licenses in 21. Market Prepares for Gradual Removal of Voluntary Cession The voluntary cession (VC) arrangement to Malaysia s national reinsurer has operated since 1973; primary general insurers in Malaysia strictly follow the cession percentage 3

4 . Special Report Exhibit 5 Takaful Net Incurred Claims & Combined Ratios (28-212) (%) Net Incurred Claims Ratio Management Expense Ratio Commissions Ratio Combined Ratio Exhibit 6 Malaysia Fire & Motor Conventional Net Incurred Loss Ratios (28-212) (%) indicated by BNM. With the development of the local insurance and reinsurance markets, VC has been on a downward trend, and BNM has indicated the VC arrangement will be eventually removed. In April 213, Malaysian Reinsurance Berhad (Malaysian Re) announced that BNM had confirmed the VC arrangement would be extended for another two years from Jan. 1, 214 through Dec. 31, 215, with the VC level for classes other than motor and personal accident further reduced to 2.5%. The VC arrangement is also expected to be removed from 216, in line with the de-tariffing of fire and motor premiums. The voluntary cession is not a unique case in the region. However, a reducing level of VC and ultimately removal of VC has been observed in some other Asian markets, given a far more mature insurance/reinsurance industry than when the VC was established. In Singapore, the VC agreement ended Dec. 31, 24. In Vietnam, the obligatory cession to Vietnam National Reinsurance Corp. (VINARE) was also canceled in 25. In India, the compulsory cession to General Insurance Corporation of India (GIC Re) for non-life business was reduced to 5% from 1% on April 1, The removal of the VC in Malaysia gives local direct insurers more flexibility in selecting their reinsurance programs. Direct players with solid capitalization will choose to fully Fire Motor Other Motor Act Cover Motor Total retain the smaller risks such as motor and personal accident. However, players facing capital pressure might continue with proportional reinsurance programs for solvency relief, but they will have more options. Removal of VC is likely to have some impact on Malaysian Re s premium revenue from the local market. However, it is not expected to substantially affect other reinsurers in the market, although some players might be able to pick up more quota-share business. Maintaining Sustainable Growth After Detariffication In Malaysia, fire and motor insurance premium rates are currently tariff-controlled, but the underwriting performance of these two lines of business in recent years diverged. Malaysia has not been impacted by any major natural catastrophes in recent years. The 4

5 Malaysian general insurance industry strictly follows fire tariffs, except that some flexibility is allowed for larger risks. Fire business underwriting performance has been favorable. Industry net incurred loss ratios between 28 and 212 ranged between 3.1% and 38.3%, according to BNM, implying that fire tariffs in Malaysia have been adequate and provided general insurers with good profits in recent years. Motor tariffs in Malaysia had not been changed for many years until 212, which addressed insurance buyers affordability concerns on one hand, but resulted in poor underwriting performance in this segment. Motor Act cover s net incurred loss ratio showed an upward trend in recent years to 31% in 211 from 271% in 28, while the total net incurred loss ratio for motor business ranged between 76.3% and 85.5% during the same period. Gradual revision of motor tariffs began in January 212 and will be implemented incrementally in the years to come. Motor business underwriting performance improved accordingly in 212, with Motor Act cover s and Motor total s net incurred loss ratios improved to 242% and 72.7%, respectively. However, motor business remains unprofitable for many Malaysian general insurers, and the underwriting losses from motor business must be cross-subsidized from underwriting profits made in other lines. Malaysia s general insurance market expects fire and motor tariffs to be abolished in 216, which will introduce increasing competition in the fire segment and help addressing the unsatisfactory underwriting performance of the motor segment. A.M. Best believes abolition of tariffs can benefit insurance buyers, the insurance industry and society in the long run. Increasing price competition, and providing more freedom to insurance companies to set the right price for the insurance risks they assume, can encourage innovation and make insurance products more affordable. This will benefit insurance buyers, but insurance companies need to be prudent in managing their insurance claims costs and expenses at the same time. Claims cost management initiatives also benefit insurance buyers by encouraging better risk awareness from the insurance buyer s perspective for example, promoting road safety to reduce frequency and severity of traffic accidents in the motor segment, or taking fire prevention measures for property risks. Further, price competition provides insurers with incentives to forecast insurance costs accurately, refine risk classification systems and underwrite carefully to avoid adverse selection. Promoting adequate rates is a key factor in ensuring insurers solvency and sustainable growth of the insurance industry in the long run. Contributors Yanwei You, Hong Kong Angela Chow, Hong Kong 5

6 Published by A.M. Best Company Special Report Chairman & President Arthur Snyder III Executive Vice President Larry G. Mayewski Executive Vice President Paul C. Tinnirello Senior Vice Presidents Manfred Nowacki, Matthew Mosher, Rita L. Tedesco, Karen B. Heine A.M. Best Company World Headquarters Ambest Road, Oldwick, NJ 8858 Phone: +1 (98) WASHINGTON OFFICE 83 National Press Building th Street N.W., Washington, DC 245 Phone: +1 (22) MIAMI OFFICE Suite 949, 1221 Brickell Center Miami, FL Phone: +1 (35) A.M. Best Europe Rating Services Ltd. A.M. Best Europe Information Services Ltd. 12 Arthur Street, 6th Floor, London, UK EC4R 9AB Phone: +44 () A.M. Best asia-pacific LTD. Unit 44 Central Plaza, 18 Harbour Road, Wanchai, Hong Kong Phone: A.M. BEST MENA, SOUTH & CENTRAL ASIA Office 12, Tower 2 Currency House, DIFC PO Box 56617, Dubai, UAE Phone: Copyright 213 by A.M. Best Company, Inc., Ambest Road, Oldwick, New Jersey ALL RIGHTS RESERVED. No part of this report or document may be distributed in any electronic form or by any means, or stored in a database or retrieval system, without the prior written permission of the A.M. Best Company. For additional details, see Terms of Use available at the A.M. Best Company Web site Any and all ratings, opinions and information contained herein are provided as is, without any expressed or implied warranty. A rating may be changed, suspended or withdrawn at any time for any reason at the sole discretion of A.M. Best. A Best s Financial Strength Rating is an independent opinion of an insurer s financial strength and ability to meet its ongoing insurance policy and contract obligations. It is based on a comprehensive quantitative and qualitative evaluation of a company s balance sheet strength, operating performance and business profile. The Financial Strength Rating opinion addresses the relative ability of an insurer to meet its ongoing insurance policy and contract obligations. These ratings are not a warranty of an insurer s current or future ability to meet contractual obligations. The rating is not assigned to specific insurance policies or contracts and does not address any other risk, including, but not limited to, an insurer s claims-payment policies or procedures; the ability of the insurer to dispute or deny claims payment on grounds of misrepresentation or fraud; or any specific liability contractually borne by the policy or contract holder. A Financial Strength Rating is not a recommendation to purchase, hold or terminate any insurance policy, contract or any other financial obligation issued by an insurer, nor does it address the suitability of any particular policy or contract for a specific purpose or purchaser. A Best s Debt/Issuer Credit Rating is an opinion regarding the relative future credit risk of an entity, a credit commitment or a debt or debt-like security. It is based on a comprehensive quantitative and qualitative evaluation of a company s balance sheet strength, operating performance and business profile and, where appropriate, the specific nature and details of a rated debt security.credit risk is the risk that an entity may not meet its contractual, financial obligations as they come due. These credit ratings do not address any other risk, including but not limited to liquidity risk, market value risk or price volatility of rated securities. The rating is not a recommendation to buy, sell or hold any securities, insurance policies, contracts or any other financial obligations, nor does it address the suitability of any particular financial obligation for a specific purpose or purchaser. In arriving at a rating decision, A.M. Best relies on third-party audited financial data and/or other information provided to it. While this information is believed to be reliable, A.M. Best does not independently verify the accuracy or reliability of the information. A.M. Best does not offer consulting or advisory services. A.M. Best is not an Investment Adviser and does not offer investment advice of any kind, nor does the company or its Rating Analysts offer any form of structuring or financial advice. A.M. Best does not sell securities. A.M. Best is compensated for its interactive rating services. These rating fees can vary from US$ 5, to US$ 5,. In addition, A.M. Best may receive compensation from rated entities for nonrating related services or products offered. A.M. Best s Special Reports and any associated spreadsheet data are available, free of charge, to all BestWeek subscribers. Nonsubscribers can purchase the full report and spreadsheet data. Special Reports are available through our Web site at or by calling Customer Service at (98) , ext Briefings and some Special Reports are offered to the general public at no cost. For press inquiries or to contact the authors, please contact James Peavy at (98) , ext SR