By NG MIN SHEN
Consolidation of the country’s insurance industry is not expected to happen anytime soon as the sector grapples with “stubborn” stakeholders, over-the-top valuations and an industry dogged by a low penetration rate.
Recent data from the central bank’s website showed there are 13 life insurance companies, 21 general insurance firms, 12 takaful operators and one life and general insurer, servicing the country’s 32 million population.
Foreign insurers had the lion’s share of the market at around 76% as of 2016 compared to 60% in 2009.
Bank Negara Malaysia’s (BNM) directive to force foreign insurers to cut their 100% holdings in their Malaysian units to below 70% has fared poorly, despite advanced talks on stake divestments with local investors.
BNM governor Datuk Nor Shamsiah Mohd Yunus deemed the industry “too fragmented” and wants a market-driven consolidation to create strong, long-term players.
MIDF Amanah Investment Bank Bhd analyst Danial Razak said consolidation involves lengthy and heavy corporate exercises with many factors.
“There are policy direction (regulation), shareholders’ composition, potential synergy and business landscape.
“Hence, we should expect that consolidation talks between insurers would take a while,” he told The Malaysian Reserve in a email.
Besides the complexity of such mega corporate exercises, the sector’s penetration rate has been sluggish.
BNM is urging “synergistic partnerships” to achieve the scale and competitive edge.
Presently, the sector only accounts for just 1.7% of Malaysia’s GDP and 5.8% of its financial assets.
Statistics showed that the national insurance penetration rate rose to 56% in 2016 from 25.3% in 1996. BNM’s aim is for the national insurance penetration rate to hit 75% in two years.
The Life Insurance Association of Malaysia (LIAM) in July 2018 said the penetration rate still hovers at 56%. Total premium has also stayed unchanged at around 4.8% over the past few years.
Danial said consolidation could be the way to resolve the low insurance penetration rate.
“While consolidation could be a step forward in solving low penetration rates, the key merging objectives should focus on achieving group-wide cost optimisation,” he said.
Lower overheads and variable costs would enable insurers to roll out affordable coverage, including to the underserved segment.
The central bank remains hopeful to achieve identical result similar to when the banking sector consolidated and the birth of 10 banking groups as anchor banks. But the banking sector consolidation was forced upon the lenders after the devastating 1997 East Asia financial crisis.
“Following BNM’s urge to consolidate, we have to note that it is something worth looking at, for transformation to happen. This is considering the synergistic effect it is able to achieve, such as a more concentrated market share, better economies of scale and a wider geographical reach,” Danial said.