PETALING JAYA: New business premiums for life insurance is projected to grow between 3% and 5% this year but much will depend on how fast the economy recovers.
RAM Rating Services Bhd co-head of financial institution ratings Sophia Lee (pic) expects sustained demand for investment-linked (IL) policies as well as the uptick in mortgage insurance contracts, due to the impetus from extended Home Ownership Campaign, to support the industry’s new business growth of 3% to 5% in 2021.
New business premiums for life insurance contracted 3% to RM11.4bil in 2020 after posting a growth of 14% in 2019.
The sector saw a strong rebound in the second half of last year, with a growth of 7% year-on-year (y-o-y), driven by the pent-up demand for policies, and this partly mitigated the sluggish sales in the first six months of 2020, which saw a contraction of 13% y-o-y.
“Expansion in the IL segment was consistent with the growth trend of the past few years. Life insurers are increasingly pushing for IL policies as investment risks of these products are borne by policyholders, which reduces the capital requirements of industry players, ” Lee (pic below) told StarBiz.
RAM Ratings is maintaining a “stable” outlook on the Malaysian insurance and takaful industry this year.
The Covid-19 outbreak and the ensuing movement control order (MCO) have adversely affected the businesses of insurers and takaful operators in 2020.
Nevertheless, she said the overall impact was manageable, given the strong comeback in the last six months of the last year, as restrictions were relaxed and industry players adapted to the new operating norm.
“We believe the insurance and takaful industry will overcome the economic adversities of the pandemic.
“The extent of the industry’s recovery in 2021, especially with respect to premiums growth and profitability, will largely correlate with that of the overall economy, which in turn, depends on the levels of infection and pace of nationwide vaccinations, ” Lee noted.
The life insurance industry’s return on assets (ROA), a measure of profitability, slipped to 7% (2019: 8.4%) in 2020, primarily attributed to the steep decline in yields on Malaysian Government Securities (MGS) during the year.
“On one hand, falling yields led to higher valuation gains for the insurers’ fixed-income portfolio, but on the other hand it inflated the provisioning on their actuarial obligations, ” she said.
Adverse stock price movements have also caused losses on players’ equity investments, although some paper losses have been recouped with the recovery of stock prices since November last year.
“In 2021, better premiums growth and a more stabilised actuarial provisioning (due to expectation of upward pressure on MGS yields) will support earnings of life insurers.
“However, a potential spike in market volatilities and protracted period of low bond returns could be detrimental to the investment yields of life players. As such, we expect a flattish or slightly higher ROA for the industry, ” Lee added.
RAM Ratings said the general insurers’ better underwriting margins in 2020 might be unsustainable.
Gross premiums of the general insurance sector totalled RM17.2bil in 2020, down 1% from the year before.
Premiums from the medical and personal accident class (which includes travel insurance) declined 10% on the back of a badly-hit travel industry, whereas the core segments of motor policies and fire coverages (jointly accounted for 69% of the sector’s premiums) experienced a marginal 0.2% contraction and 1.6% growth, respectively.
“The two product classes (motor and fire policies) performed surprisingly well amid the pandemic, considering they had grown at sub-optimal levels since the implementation of de-tariffication in 2016, ” Lee noted.
In light of the Covid-19 outbreak, the second phase of de-tariffication – which widens the bands general insurers can revise premium rates of policyholders from existing fixed tariffs - that was meant to be initiated last year has been put on the back burner.
Besides the same quandary on investment yields, general insurance companies could face potential underwriting margin correction, the rating agency said.
Propped up by a lower claims ratio consequent to the imposition of MCO in 2020, the underwriting margin of the general insurance sector was stronger at 10% (2019: 7%).
In view of the anticipated normalisation of claims trend as economic recovery gathers steam, such elevated margin may not be sustainable, Lee said.
In the takaful sector, family takaful new business contributions were similarly affected by the economic ramifications of the pandemic.
It registered growth of 7% in 2020, which is markedly lower than the 17% (excluding MySalam contributions) in the previous year. Slower contributions growth had lowered the sector’s ROA to 9.7% (2019: 12.7%).
For 2021, family takaful sector’s new business growth could bounce to 10%-12%, supported by the recovery of credit-related business (primarily mortgage reducing term takaful).
Meanwhile, general takaful contributions grew at a more subdued pace of 5% to RM3.5 bil in 2020 (2019: +20%), mainly on account of 12% decline in car sales that took a toll on motor takaful.
However, by virtue of motor takaful’s unique ability to offer cashback incentives from fund surpluses, an uptick in vehicle sales would likely invigorate general takaful premiums growth in 2021. RAM Ratings predicts growth in general takaful to be in the ballpark of 6%-8% this year.
In terms of capitalisation of the industry on the whole, Lee said: “As we expect gradual recovery in MGS yields over the course of 2021, the capital positions of industry players should remain sound in face of the economic obstacles ahead.”
The life insurance and family takaful sector recorded a preliminary capital adequacy ratio (CAR) of 203.5% as at end-December 2020. Although reduction of MGS yields had resulted in capital erosion of 2.7% over the course of 2020, the CAR comfortably exceeded the minimum requirement of 130%.
Meanwhile, the general insurance and takaful sector’s CAR was a solid 282.6% during the period (end-December 2019: 279.8%).