TEXT-Fitch: Regulations to Erode Malaysian Insurers' Margin Stability
(The following was released by the rating agency)
Link to Fitch Ratings' Report: 2013 Outlook: Malaysia Insurance Sector
HONG KONG/SEOUL/SINGAPORE, December 13 (Fitch) Fitch Ratings says Malaysia's insurance and takaful sector may see its earnings stability challenged by regulatory initiatives and on-going capital market volatility. Otherwise, the sector will continue to be underpinned by steady market growth and sound capital management, as underlined in its Stable Outlook.
In a special report published today, Fitch says the regulator's intention to eliminate both life insurers' cap on acquisition costs and the fire tariff pricing structure could undermine the stability of insurers' operating margin. The impending implementation of Personal Data Protection Act could also modify insurers' business practice, potentially leading to higher compliance costs.
"Generally, insurers have been able to maintain satisfactory operating margin due to favorable claim experience from non-motor lines, sound investment return and steady surrender rates, as well as a stable expense ratio," says Terrence Wong, Director in Fitch's Insurance team.
Equity market volatility is unlikely to hold back new premium growth of life insurance products, based on the solid demand for investment-linked insurance policies witnessed in H112. Low market penetration and wider distribution coverage with the entry of more takaful players could accelerate the growth of the general and family takaful market.
Fitch takes a positive view of Bank Negara Malaysia's introduction of a risk-based capital framework for the takaful sector, which would align the capital requirement of takaful operators with that of conventional insurers. This also means capitalisation would be more reflective of takaful operators' risk exposure. Capitalisation of conventional insurers remains healthy as the industry-wide consolidated capital ratio in Q312 was still well above the 130% regulatory minimum.
Negative rating trigger for the life and non-life insurance sectors includes extreme equity market volatility. Widening of deficits from third-party bodily injury and death motor insurance could also affect the Outlook on the non-life sector. Conversely, the Outlook on the non-life sector could be revised to Positive if insurers are able to consistently improve their overall underwriting margin after the liberalization of compulsory motor pricing. The report, '2013 Outlook: Malaysia Insurance Sector', is available on www.fitchratings.com or by clicking on the link above.
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