PETALING JAYA: Malaysia’s insurance and takaful sector is expected to remain resilient in the second half of 2026 (2H26) despite continued pressure from medical inflation, weaker investment returns and softer consumer spending, with industry reforms expected to gradually improve affordability, claims sustainability and operational efficiency.
“Healthy capital buffers continue to cushion insurance and takaful operators against market volatility and earnings pressures, particularly in the life insurance and family takaful segments,” said Sophia Lee, senior vice president of Financial Institution Ratings at RAM, in conjunction with the release of RAM’s latest commentary, “Insurance and Takaful Insight: Paving the Way Forward”.
Nevertheless, she said new business growth in the life insurance and family takaful segments is expected to remain broadly flat in 2026 after contracting 0.6% in 2025, with demand for investment-linked products is likely to stay subdued amid heightened financial market volatility and geopolitical uncertainty.
“Persistent cost-of-living pressures, including potential spillovers from higher energy prices, could also dampen spending on protection products,” said Lee.
RAM said reforms involving the medical and health insurance and takaful (MHIT) base plan, the diagnosis-related group (DRG) payment framework and ongoing motor insurance liberalisation would gradually improve the industry’s operating environment.
Non-life insurance and takaful premium growth is also forecast to moderate to between 5% and 6% in 2026 from 6.5% last year, although growth is expected to remain above pre-Covid-19 levels, supported mainly by motor and fire insurance.
According to RAM, weaker vehicle sales are likely to temper premium growth, while higher energy costs could eventually translate into higher motor repair expenses and place pressure on underwriting margins.
Its report noted that medical inflation remains the industry’s most pressing challenge, staying at 15% in both 2024 and 2025, significantly above both regional and global averages.
Although premium repricing has helped insurers cope with rising claims, it has also triggered policy surrenders and public dissatisfaction.
RAM warned that sustained affordability issues could weaken policy persistence and reduce the pool of lower-risk policyholders, potentially worsening claims experience over time.
The rating agency said structural healthcare reforms under the government’s Reset strategy are designed to address these issues by improving cost transparency, moderating medical inflation and enhancing healthcare delivery efficiency.
Among the key initiatives are the introduction of a basic MHIT product, the adoption of DRG-based payment systems, and the planned Rakan Kementerian Kesihatan Malaysia programme.
However, RAM cautioned that meaningful improvements will take time.
“Nonetheless, we expect such reforms to moderate claims inflation only in the longer term as hospitals, payors and policyholders adjust to new reimbursement incentives, with execution risk remaining high in the interim,” it said.
The report added that the planned nationwide rollout of the base MHIT product in early 2027 should provide a more affordable alternative once Bank Negara Malaysia’s (BNM) temporary premium adjustment measures expire at the end of 2026.
RAM believes the product could eventually expand insurance penetration by attracting new customers despite initially generating thin margins for insurers.
Meanwhile, healthcare pricing transparency has improved following the publication of price ranges for 26 common medical procedures and the establishment of a central medical claims database, laying the groundwork for broader DRG implementation in the years ahead.
Beyond healthcare, the rating agency said Malaysia’s motor insurance market continues to undergo significant transformation through tariff liberalisation and digitalisation.
The pilot implementation of online police reporting and end-to-end digital claims processing is expected to improve claims efficiency, while wider adoption of telematics should enable insurers to price risks more accurately and encourage safer driving behaviour.
The growing adoption of electric vehicles (EVs) also presents both opportunities and challenges.
RAM said EVs typically involve higher repair costs because batteries account for a substantial portion of vehicle value, while limited repair expertise and a lack of historical claims data make accurate pricing more difficult.
Separately, it noted that life and non-life insurers continue to maintain capital adequacy ratios comfortably above regulatory requirements, although life insurers would face narrower buffers under severe stress scenarios, mainly due to medical repricing constraints.
The report also highlighted the growing importance of takaful, which continues to outperform conventional insurance across both family and general segments.
General takaful increased its market share to 22% in 2025 and is expected to continue expanding, supported by Malaysia’s mature Islamic finance ecosystem and competitive product offerings.
RAM said: “Takaful remains a key growth driver, supported by its strong Islamic finance ecosystem and distinct syariah-compliant value proposition.”
It added that long-term success would depend on operators maintaining disciplined underwriting while balancing profitability, capital management and growth.
Of note, RAM said insurance penetration remains below BNM’s target despite various government incentives, including tax relief and support for microinsurance and microtakaful schemes, suggesting further policy coordination and digital distribution efforts are needed.
Looking ahead, RAM expects that with Malaysia becoming an ageing society within the next decade, demand for retirement planning, long-term care, critical illness and wealth preservation products is likely to increase substantially.
It said insurers capable of combining simplified underwriting with innovative product design and cost-sharing arrangements would be better positioned to serve older customers while preserving profitability.
Concurrently, Delton Bvukurusi, director of business development analysis at financial services firm Dollars & Sense Solutions, described the outlook for the insurance industry in 2H26 as cautiously constructive rather than overtly bullish.
“The industry’s fundamentals remain healthy as capital is abundant, insurance demand continues to grow broadly in line with the economy, and regulatory oversight remains among the strongest in the region.
“However, profitability, not premium growth, is now the key battleground,” he told StarBiz.
Bvukurusi explained that medical inflation of around 16% continues to outpace pricing power, while political and regulatory pressure means insurers have limited room to fully pass on costs to policyholders.
Hence, he said medical inflation remains the single biggest profitability challenge for the insurance industry, and is particularly acute for life insurers and family takaful operators because individual medical and health insurance is primarily housed within those businesses.
Bvukurusi added that the government’s reforms, the MHIT plan and greater price transparency are all heading in the right direction, but none will materially improve claims experience in the next six to twelve months.
“Consequently, we expect life insurers to focus less on chasing top-line growth and more on repricing portfolios, improving claims management, promoting co-payment products and shifting towards protection products with better margins rather than investment-linked business,” he said.
On the flip side, he said general insurance offers a brighter earnings outlook for 2H26, with motor insurance underpinned by a still-resilient vehicle market, while infrastructure projects, data centres and industrial investments should continue supporting commercial fire and engineering lines even if economic growth moderates.
“Nevertheless, the risks are also becoming more apparent, as EVs will make claims more expensive before insurers accumulate sufficient actuarial data, weather-related catastrophes will keep testing reinsurance programmes, and pricing competition could intensify if digital insurers enter aggressively,” said Bvukurusi.
Even so, he believes the insurance industry is entering 2H26 from a position of strength, as companies that invest in analytics, healthcare partnerships and disciplined underwriting should widen the gap over competitors.
“In other words, this is no longer a market where everyone wins simply because premiums are growing; execution quality will increasingly determine who generates attractive returns on capital,” he said.
