Covid-19 poses no immediate downside earning risks to insurance industry

The overall insurance sector will still be mainly supported by the sustained growth coming from the life insurance and family takaful segments


THE Covid-19 outbreak could present an opportunity for insurers to boost healthcare policy sales instead of having a negative impact on earnings according to industry players.

As the infection levels remain low, at 55 (at press time), the domestic insurance sector’s earnings are expected to remain stable, analysts believe but industry insiders see a potential opportunity.

“After the SARS crisis in 2003, the health and insurance market in Malaysia grew by 35%. It was the trigger point that created sensitivity among people thinking they need to invest to protect their health,” said Allianz Life Insurance CEO Joseph Gross.

While it will be too optimistic to expect such exponential growth of more than 30% across the insurance industry, Gross does not anticipate an immediate negative impact on insurers’ balance sheet either.

MIDF Amanah Investment Bank Bhd (MIDF Research) analyst Khoo Zhen Ye agreed the widespread transmission of the virus which originated from Wuhan, China, will most likely trigger demand for health and medical coverage, especially with insurance providers offering extra protection for hospitalisation that covers compounding expenses incurred during treatment.

“While this may encourage some non-policy holders to purchase certain insurance products, we do not view this as a significant catalyst to the insurers’ earnings.

“This is premised on the limited coverage that in our view is not very much appealing as insurers will need to cover their downside as well,” he told The Malaysian Reserve yesterday.

Khoo added that the travel restrictions announced by several countries in the effort to contain transmission, dampen the demand for travel insurance.

Although measures to restrict movement during public health emergence are deemed effective, they also divert and disrupt businesses, leaving a negative impact on their earnings, especially in an already subdued economic environment.

“The moderated economic impact resulting from the virus might cause people to treat insurance purchases to be less of a priority, predicated on the already stagnant penetration rate in Malaysia,” he said.

“This is premised on the softening of the economic indicators such as weakening of the business confidence and expectations on the insurance sector, as well as slumping retail sales growth which will possibly dampen the demand for insurance products,” explained the firm.

However, the overall insurance sector will still be mainly supported by the sustained growth coming from the life insurance and family takaful segments.

This as MIDF Research observed, takaful products have competitively lower pricing, broader coverage and higher capacity in a bid to increase the adoption of such products.

“In addition, we are seeing aggressive market expansion by insurers such as FWD Takaful Bhd in the family takaful industry.

“With the relatively stagnant penetration rate, we are seeing an increasing number of major insurers rolling out competitive products that are more affordable, and offer broader coverage and relaxed underwriting criteria in order to incentivise the mass market to gain market share,” said MIDF Research.

This is especially getting prominent in the takaful segment in view of the favourable demographics in Malaysia that could entice major insurers to adopt aggressive market share expansion.

MIDF Research said the possible lower premium pricing and higher expenses may soften the underwriting margin of insurers as it vies for market share in the anticipated increasingly competitive insurance industry.

“Nonetheless, we expect the growth of the life insurance and family takaful to remain resilient with the insurance tax relief of RM3,000 and banking on the popularity of investment-linked insurance products,” it said.

MIDF Research in a sector report said lower average premium and increasingly competitive industry dynamics could likely indicate the Malaysian insurance sector may be experiencing a soft market cycle, especially in the general insurance segment.

This is possibly due in large part to the de-tariffication of the motor and fire insurance classes.

He added that the fourth quarter of 2019 (4Q19) earnings of insurers under MIDF Research’s coverage, revealed net earned contributions and premiums, as well as earnings, were experiencing tapering growth or a decline.

“We are of the view that this may indicate the insurance sector is entering into a soft market cycle,” he said.

The soft market is characterised by lower insurance premiums, broader coverage and relaxed underwriting criteria amid increased competition and capacity.

Thus, a soft market will put downward pressure on insurance companies’ bottom line as premium is the main revenue source.

“Factors fuelling the soft market could comprise of softening macroeconomic indicators, low insurance penetration rate, deregulation of the general insurance industry, and increased number of insurance providers and products,” the firm said.

The ongoing de-tariffication of the motor and fire insurance and the increased competition continues adding downward pressure on the underwriting margin of the general insurance and general takaful segment as they undercut on product pricing in order to gain market share.

According to Bank Negara Malaysia’s Financial Stability Review, the premium rates for the 8.2 million in-force private car policies as at the end of June 2019 were either lower or maintained for 43% of policies.

For the first nine months of last year, the Malaysian general insurance industry posted a 1% contraction in gross written premium.

“As such, we foresee general insurers’ gross premium and contribution income growth will continue to be subdued, particularly the more matured general insurance segment,” MIDF Research stated.

The motor and fire insurance are the two biggest insurance classes in the general segment, accounting for 70% and 80% for general insurance and general takaful respectively.

“While motor has been almost fully liberalised, we postulate that the review of further detariffication of the fire insurance possibly in coming quarters may be an area of concern for insurers who have a larger exposure such as LPI Capital Bhd,” it said.