Takaful, insurance sector remains stable

by NUR HAZIQAH A MALEK / graphic by TMR

RAM Rating Services Bhd has maintained a ‘Stable’ outlook on the insurance and takaful industry due to the impact of the second Movement Control Order (MCO 2.0) being offset by the industry’s rebound in the second half of 2020 (2H20).

RAM Ratings financial institution rating co-head Sophia Lee said the outbreak and MCO 2.0 have been detrimental to the performances of insurers and takaful operators last year.

“The overall impact was still manageable, courtesy of the strong rebound in 2H20 as restrictions eased and industry players adapted to the new operating norm.

“We believe the insurance and takaful industry will overcome the economic adversities of the pandemic,” she stated in conjunction with the rating house’s latest commentary on the sector titled “Insurance and Takaful Insight: Silver Linings Emerging, but Worst is Not Over”.

Lee added the extent of the industry’s recovery in 2021, especially with respect to premiums growth and profitability, will largely correlate with the overall economy.

According to RAM Ratings, the industry’s capitalisation is expected to stay sound in the face of economic challenges.

As at end-December 2020, the life insurance and family takaful sector recorded a preliminary capital adequacy ratio (CAR) of 203.5%, while the general insurance and takaful industry’s CAR was a solid 282.6%, versus the values in the previous year of 206.2%% and 279.8% respectively.

The rating agency stated life insurers are increasingly tilting towards investment-linked (IL) policies as investment risks of these products are borne by policyholders, which reduces the capital requirements of players.

“Fuelled by the sustained demand for IL policies and the uptick in mortgage insurance contracts due to the impetus from the extended Home Ownership Campaign, we forecast new business (NB) growth of 3%-5% for the life insurance sector in 2021,” it said.

The industry has seen NB premiums in the life insurance sector contract by 3% to RM11.4 billion in 2020 after 2H20 saw a 7% year-on-year strong rebound which partly mitigated the sluggish sales in the first six months.

The rebound over the last six months was driven by healthy demand for IL policies, in line with the growth trend of the past few years.

RAM Ratings expects a flattish or slightly higher return on assets for the life insurance industry.

“Better premiums growth and a more stabilised actuarial provisioning will support earnings of life insurers in 2021. However, a spike in market volatilities and a protracted period of low bond returns could affect their investment yields,” it said.

The life insurance industry’s return on assets slipped to 7% in 2020 (2019: 8.4%) due to falling yields on Malaysian Government Securities, which led to higher valuation gains for the insurers’ fixed income portfolio and inflated the provisioning on their actuarial obligations.

Adverse stock price movements also triggered losses on players’ equity investments, while some paper losses were recouped with the recovery of stock prices since November 2020.

RAM Ratings noted gross premiums from the general insurance sector, motor policies and fire coverages performed better than expected, considering the pandemic and suboptimal growth trends since the de-tariffication in 2016 and the second phase of de-tariffication that was meant to be introduced in 2020 but had been shelved.

“The profitability of general operators in 2021 might be affected by pressure on investment yields and possible underwriting margin correction. Underwriting margin is higher at 10% in 2020, which was 7% in the previous year, as a result of the anomalously lower claims ratio following the imposition of MCO,” it said.

For 2020, gross premiums of the general insurance sector slipped to RM17.2 billion from RM17.4 billion in 2019.

Premiums from motor policies and fire coverage (jointly contributing 69% of the sector’s aggregate) experienced 0.2% contraction and 1.6% growth respectively.

The takaful sector’s NB grew 7% in 2020 against 17% growth in 2019.

“For 2021, NB growth could rebound to 10% to 12%, driven by the recovery of mortgage takaful contracts. General takaful contributions grew at a subdued 5% to RM3.5 billion in 2020 against 20% in the previous year, mainly due to the 12% decline in car sales which affect demand for motor policies,” RAM Ratings stated.