BNM says further consolidation in insurance sector needed to lift economy

Players need to look at how to strengthen long-term viability and sustainability, according to its governor


The insurance industry should consolidate further to shore up insurers’ performance and play a more positive role to drive the country’s economy, Bank Negara Malaysia (BNM) governor Datuk Nor Shamsiah Mohd Yunus said.

“The industry is too fragmented. Players need to look at how to strengthen their long-term viability and sustainability, and having greater consolidation is one way of achieving that.

But it will be a market-driven consolidation,” Nor Shamsiah told reporters after officiating the Malaysian Insurance Summit 2018 in Kuala Lumpur last Friday.

In her keynote address at the event, Nor Shamsiah said insurance and takaful companies, alongside banks, have an important stabilising effect on markets during the recent episodes of heightened market volatility.

“It is therefore timely, if not more urgent, for institutions to consider synergistic partnerships to achieve the scale and competitive edge to lift performance and break into new markets.

“Our economy is in need of transformational change in the insurance sector — not incremental ones. To achieve this, we believe there is room for further consolidation in the industry,” she said.

This, however, cannot happen unless the industry steps up its game and takes a more strategic view of its role in the economy, working more proactively across the industry with relevant bodies and agencies.

In Malaysia, insurance accounts for just 1.7% of GDP and 5.8% of financial assets. She said there is a significant untapped potential for the industry to increase its broader economic impact and feature much more prominently in Malaysia’s growth story.

Domestic insurance penetration remains sluggish, with penetration in terms of total premiums to GDP remaining low at 4.8% over the past few years.

Health expenditure stands at around 4.6% of GDP, while the Malaysian medical and health insurance market has the highest average gross medical inflation at around 15.4% in 2018 — a number which is expected to continue to rise.

Nor Shamsiah said there is an “urgent need” for the industry to design a more positive customer experience, as the central bank’s engagements with the public indicate that many Malaysians find purchasing insurance as too troublesome.

Products are perceived to be too convoluted, complicated and non-transparent — something BNM is viewing very seriously, given the measures it has taken to encourage the use of plain language, coupled with clear and concise disclosures.

“In many ways, the industry is in a prime position to seize the opportunities arising from these technologies (artificial intelligence, big data and robotics) given that the ability to manage risk remains the single most compelling proposition of insurance,” she said.

The central bank will also look closely at the experience with direct distribution channels to date, with greater impact desired from direct channels — including online or mobile platforms — to support higher insurance penetration.

Further attention also needs to be paid to the role of shared infrastructure to support insurance undertakings, building further on the fraud and motor insurance databases.

In order to facilitate innovation, BNM intends to lower the barriers to innovation and competition via a regulatory sandbox for the industry, including non-insurance players, to test innovations without costly regulatory reprisals.

It also aims to better reflect proportionality in its regulatory framework by applying a more proportionate approach to reduce compliance costs for insurers introducing innovative solutions in areas where risks to consumers are low.

The monetary authority will develop a more coherent approach across agencies to ensure legal and regulatory compatibility with new insurance innovations, including addressing issues that may arise in legal constructs and strengthening defences against cyber threats and abuses by criminal elements.

With more than two-thirds of new premiums generated from investment-linked products in 2017 and an environment of heightened financial market volatility, a key concern for BNM has been with the complexity of products offered and the level of understanding of the investment risk.

“From our observations, the safeguards in place within insurers over product design, disclosure levels and suitability assessments continue to reveal gaps,” she said, adding that the central bank has consulted the industry on potential enhancements to address some of these gaps.

“We expect to finalise the requirements to the Minimum Allocation Rate shortly to protect the account value of consumers,” Nor Shamsiah said.

The central bank is also currently assessing the outcomes of the second phase of the liberalisation of motor and fire tariffs which started in 2016, as it prepares to launch the next phase of liberalisation.

“Over the coming months, we will be able to form a clearer view on the market impact of premium rate adjustments. This will allow us to consider further flexibilities in the pricing bands,” she said.

Meanwhile, Nor Shamsiah was asked by the media on the government’s move to raise funds and selling of its non-core assets.

Q: The finance minister has mentioned that the government is going to sell non-core assets, including land. Will that include the land bought by BNM?

Nor Shamsiah: We already bought that land. I think no…(it’s) just about the government monetising its assets to raise revenue, so it’s more about that.

Q: So there’s no plan to dispose of that land, perhaps to open it up to the public?

Nor Shamsiah: It’s something that I’m looking into.