Insurance mergers gaining pace


  • Business
  • Thursday, 09 Jan 2003

BY DALJIT DHESI

Tan Beng Wah

THE ongoing consolidation in the insurance industry, despite some minor hiccups initially, has been quite successful, and is seen forming the foundation for further mergers. 

“Since 2001 the mergers and acquisitions of insurance companies have been quite successful,’’ MCIS Zurich Insurance Bhd chief executive officer L. Meyyappan told StarBiz

He attributed this trend largely to the due diligence process in choosing the right partners and synergies created within the merged operations. 

“When it comes to consolidation, the current trend among insurance companies is still influenced by market forces rather than compulsion from the authorities,’’ he said. 

“In its decision whether to merge or not, there are three factors which influence an insurance company: first, the issue of capital requirement; second, the solvency requirement; and lastly, the profitability which the company will derive from the merger process,” Meyyappan added. 

Between 1999 and 2000, a total of 14 mergers and acquisitions involving 27 insurers have been successfully completed, reducing the number of direct insurers operating in the industry to 44 from 58, according to Bank Negara. 

Several initiatives to hasten the pace of consolidation were taken by the central bank under the first stage of its Financial Sector Masterplan, including an increase in the minimum paid-up capital of insurers to RM100mil in 2001. 

As a result, the central bank said, insurers were now better positioned to take advantage of opportunities for growth and remain resilient in uncertain market conditions. 

According to Bank Negara, the current capitalisation of the industry (including working funds of foreign branch insurers) now stands at RM5.7bil. 

Asia Life (M) Bhd chief executive officer Tan Beng Wah said in addition to the higher minimum paid-up capital requirement, steps should be taken to liberalise the industry faster so that more competition would be created among players, making the consolidation process more effective. 

South East Asia Insurance Bhd (SEA Insurance) chief executive officer Hashim Harun also shares the view. According to Hashim, insurance companies have been making steady progress in the consolidation exercise, but to further improve efficiency greater liberalisation of the industry is needed. 

On pushing for liberalisation, Meyyappan said allowing more players into the industry at this time might probably do more harm than good as the market was still relatively small. 

On the likely developments in the industry this year, Hashim expects continuous growth in the takaful business, as well as alternative channels of distribution via bancassurance and the creation of more value-added services through the Internet. 

In view of the intense competition in the industry, SEA Insurance envisages greater advertising expenditure, focusing on brand building, by insurers. 

Meyappan said that one of the challenges this year would be the need to maximise returns on investment despite the current unfavourable investment climate.  

He estimated total investments by the life insurance industry at more than RM50bil. 

Another challenge would be the rising number of unit trust products in the country, which Meyyappan described as overlapping with existing investment-linked insurance products. 

Tan expressed optimism about the industry’s growth partly due to the fact that gross domestic product growth this year is expected at between 4.5% and 5%. 

He also expects the investment environment and current performance level of the industry to be maintained, thereby easing the pressure for further reduction in bonuses and dividends. 

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