RAM Ratings senior vice president of financial institution ratings Sophia Lee
PETALING JAYA: The insurance and takaful sector has adequate capital buffers in place to withstand market volatility amid external uncertainties and rising medical cost inflation.
As such, RAM Rating Services Bhd has maintained its “stable” credit outlook for the sector, reflecting expectations of steady expansion supported by robust capital buffers.
RAM Ratings senior vice-president of financial institution ratings Sophia Lee, in conjunction with the release of RAM’s latest commentary Insurance and Takaful Insight: Reforms in Motion, told StarBiz: “These buffers are expected to be sufficient to buffer against market volatility amid external uncertainties, and earnings headwinds from persistent medical cost inflation, particularly for life insurers, and price competition in detariffed non-life products.”
She said high medical cost inflation remains the life insurance industry’s most pressing near-term challenge, driving national healthcare reforms to ensure long-term sustainability.
To this end, Bank Negara Malaysia (BNM) is requiring insurers and takaful operators (ITOs) to spread insurance premium increases over a minimum three-year period as an interim measure to manage the impact of rising medical costs.
Working alongside the Health Ministry, the central bank has introduced several key initiatives.
These include a base medical and health insurance and takaful (MHIT) product and the diagnostic-related group payment model, which replaces fee-for-service system with fixed, bundled payments.
The objective is to contain costs, enhance pricing transparency and reduce billing discrepancies between self-paying and insured patients.
These reforms, alongside expanded microinsurance offerings, should help curb medical inflation, improve coverage affordability and narrow the protection gap, particularly for lower-income households, she said.
Lee added that while BNM’s interim measures to stagger or delay MHIT repricing may weigh on life ITOs’ profitability, the impact should be manageable for most.
In 2024, strong investment returns, driven by stock market revaluation gains in the first eight months – before tapering slightly towards year-end – helped offset underwriting losses in the life insurance sector.
However, some normalisation in equity valuations in the first half of 2025 (1H25) led to a lower return on assets of 2.5% (2024: 8.1%).
Given ITOs’ sizeable investment portfolios, financial market volatility remains a key determinant of overall sector returns, RAM Ratings noted.
Looking ahead, Lee said the rating agency has projected new business (NB) growth in the life and family takaful segment to moderate to around 3% to 5% in 2025, weighed down by weaker household purchasing power as consumers continue to grapple with rising living costs.
While life and family takaful NB rose by 8% in 2024, it registered a negative growth of 3% in the 1H25.
“These pressures are likely to persist, exacerbated by higher electricity tariffs and the expanded scope of the sales and service tax (SST) since July 2025,” she noted.
RAM Ratings expects non-life premium growth to taper to 5% in 2025, down from 7% in 2024.
It said motor insurance remains the key driver despite weaker vehicle sales this year. In the first eight months of 2025, vehicle sales declined by 3.8% year-on-year to 516,862 units.
RAM Ratings also expects growth in the fire insurance segment to benefit from sustained property transactions, rising awareness of property protection, and higher average premiums.
Meanwhile, demand for medical and personal accident coverage will likely stay healthy.
Lee said adverse motor and weather-related claims, alongside investment returns to a smaller extent, will continue to drive earnings volatility in the non-life sector.
She emphasised that pricing and underwriting discipline, particularly following motor detariffication, remain crucial to defending earnings.
In 1H25, the non-life sector’s claims and combined ratios held steady at around 58% and 94%, versus 59% and 95% respectively in 2024, with margins likely to stay compressed due to price competition.
“Risk-based pricing reforms in the motor segment since 2016 have advanced with digital roadside assistance in recent years, giving non-life ITOs more pricing flexibility for comprehensive products.
“The next phase is full motor claims digitalisation, including online police reporting (pilot in 2025) and digital loss assessments.
“Third-party motor products will remain tariffed to ensure affordability, while third-party fire and theft products are likely the first to be liberalised,” Lee said.
She said further upside may come from digital entrants, with licence applications open until December 2026.
These new players are expected to drive innovation and cost-efficient distribution to address underinsurance, without posing a threat to incumbents, she noted.
Nonetheless, Lee said greater protection awareness and financial literacy remain essential to deepen insurance penetration.
“The regulator’s risk-based capital reforms should strengthen the sector’s credit fundamentals and resilience. Preliminary feedback suggests a manageable capital impact, although more aggressive players may require additional buffers.
“With implementation (expected) no earlier than 2027, some ITOs may pre-emptively manage to raise capital,” she said.
