The State of the Insurance Industry in Malaysia

The insurance industry in Malaysia dates back to the colonial era. To start with, British-based insurance houses provided financial protection for British business interests in Malaya. It was only after Independence that the Malaysian government and private investors began establishing their own operations, or took over – wholly or by majority control – foreign insurers.

In 2009 the market was further liberalised when foreign insurers were allowed to increase their ownership of local insurers from 49% to 100%. Industry oversight was placed under Bank Negara Malaysia (BNM) in 1988, which took over from the Ministry of Finance.

What makes Malaysia’s insurance sector unique is that a conventional insurance market exists side-by-side with its Islamic counterpart, called takaful. The takaful industry began in 1984 when the first Islamic insurer, Syarikat Takaful Malaysia, was born.

In the past, insurers were allowed to operate composite operations – i.e. combining life and general businesses under a single license. However, in 2013 this came to an end and composite insurers were instructed to separate the general and life businesses into two distinct entities, each with their own license. To smooth things over, a five-year grace period was granted to insurers to meet the deadline. To date, the progress has been good and there remain only three composite conventional reinsurers.1

The new rules of engagement were aligned with global insurance norms, which was to put an end to the practise of life insurance funds being diverted to shore up the cash crisis of general insurers. Another benefit of the separation was a stronger and more discerning business focus.

In its 2017 annual report, BNM lists 55 insurers and takaful operators, including reinsurers and re-takaful operators (Table 2).

There are several types of insurers. There are stand-alone insurance companies – local (e.g. Takaful Ikhlas) and foreign-owned (e.g. AIA, MSIG) – or sister companies of banks (e.g. AmMetLife, which share the same holding majority owner as AmBank – AMMB Holdings). Insurers are incorporated either as wholly owned companies by local shareholders or are joint ventures between local shareholders and a foreign partner. There are also 11 insurers that are 100% owned by non- Malaysian insurers. Foreign insurers are only allowed to operate in Malaysia if they are locally incorporated and branches of foreign incorporated insurers are barred. The exceptions are reinsurers, be they conventional or takaful.2

Local and foreign insurers offer general and life insurance (and takaful versions) either via their own agencies (e.g. Great Eastern has 19,000 agents and 19 branches) or by bancassurance agreements (by banks acting as sale agents e.g. CIMB Bank distributes Sun Life life/takaful family products).

Despite great strides made by local insurers in the last few decades, foreign insurers still own the lion’s share of the Malaysian market. Close to 70% of all insurers in Malaysia are owned by foreigners and more than two-thirds of the life insurance gross premiums are from three foreign insurers alone – Great Eastern, Prudential and AIA.3

Who is Insured?

From one angle, the life insurance penetration rate in Malaysia is not disappointing. If the total number of policies sold (many do hold more than one policy at a time) is considered, the penetration rate is a decent 56%.4 However, after a terrific initial run, the growth rate has plateaued since 2012, and the penetration rate has not moved beyond 56%. It looks highly unlikely that we will achieve the target of 75% penetration rate by 2020, which was set in the Economic Transformation Programme.

A bleaker picture appears if multiple policies for the same policy holder were to be stripped away. Then, the penetration rate of life insurance and family takaful is a mere 36.5% (2017).5

In its 2017 annual report, BNM breaks down the insurance penetration rate further. The penetration rate is highest among employed adults (20 to 59 years old), at 50.4% (2017). As for insurance types, whole life, endowment, mortgage-related term insurance and takaful products are the most popular, with a 64.8% share of total new premiums. When we measure product class, investment-linked products emerge as the largest, with a 44.5% share of new premiums. For distribution channels, agency and bancassurance account for over 86% of new premiums. Brokers, direct clients and internet sales make up the rest.6

BNM’s annual report reveals another distressing fact: the poor uptake of insurance and takaful among the B407 group. It goes on to list other numbers to support this assertion – only 4% of lower-income households are protected by life insurance or family takaful and the B40 penetration rate was at a paltry 30.3% (2016), compared to the national penetration rate of 50.4% (2017).

The B40 and non-B40 penetration rates also vary across states. In heavily urban areas like KL, 88% of the non-B40 group aged 20 to 59 years old have insurance and takaful coverage compared to only 30% for the B40. This pattern is mirrored in less-developed states such as Sabah, where 30% of non-B40 have insurance and takaful compared to 19% of the B40. The message is the same – while non-B40 penetrations rates are always higher than that for B40, the average penetration is higher in urbanised states than in rural states.

In its report, BNM identified several factors behind the poor insurance take-up rate; they include agents’ reluctance to service semi-urban areas, insufficient full-time agents and a dearth of affordable insurance products for the B40 segment. The last factor is reiterated by a 2017 BNM survey of 23 life insurers and family takaful operators which found that only eight insurers offered life and family takaful products with monthly premiums below RM15, which is what the B40 can afford to fork out.

Even if they are insured, Malaysians are underinsuring themselves. A survey done five years ago by the life insurance industry and a local university found that close to 90% of Malaysians are considered to be underinsured.8 The study found that the average protection gap9 was RM533,000 for families whose main breadwinner has life insurance and RM723,000 for families without any. The insurance industry estimates that life insurance coverage should reach at least 10 times the breadwinner’s annual salary; however, coverage is often only one or two times larger.

To address the issue, BNM and industry players rolled out Perlindungan Tenang in 2017 – an insurance specifically tailored for the B40 group. Perlindungan Tenang products are affordable, of good value, accessible, written in simple language and straightforward to purchase and claim. Response from the industry has been good: by the end of 2017, 10 Perlindungan Tenang products had been introduced to the market from six life insurers, three family takaful operators and one general insurer. More than 2,000 Perlindungan Tenang policies flew off the shelves within the first two months of its introduction.

The insurance industry10 has grown tremendously over the last two decades, as measured by the size of its assets. After registering a 12.3% growth in 2010, from RM161.1bil in 2009 to RM180.9bil in 2010, the growth of assets from 2010 to 2017 has been confined to single digits, mostly due to the high base effect and slow industry growth. In 2017 total assets of the insurance industry stood at a whopping RM294.9bil or 25% of GDP.11 Throughout 2009-2018, life/family takaful assets dominated, with an average of 85% of total assets.

Takaful was first introduced in 1984 but it is growing faster than the conventional insurance industry; in 2009 their share was only 7% but had grown to 12% in 2017 due to untapped demand from a Muslim-majority populace and a low-base effect. And similar to conventional insurance, 97% of the takaful assets belong to the family takaful industry.

Areas of Investment

Where do insurers invest the premiums that they receive from their policy holders? The funds go into assets that match the duration of their liabilities, which is called asset/liability matching. For example, premiums from a life insurance policy would be mostly invested in long-duration assets such as bonds or lent out as housing loans. Other factors influencing investment decisions are macroeconomics, politics and industry-specific conditions. When the economy is robust, a fund manager’s risk appetite is higher and the converse is true under weak economic conditions.

Malaysian insurers’ investment strategy is no different and they invest in a variety of assets based on a risk-and-return strategy. These assets include Malaysia government bonds or MGS bonds issued by private corporates, properties, equities, loans (mortgage loans and personal loans to policy holders); some of these assets are even foreign-based. These assets carry a variety of returns which are in direct proportion to their risk. Equities usually carry the highest risk but also the highest returns while government bonds and property investments carry the lowest risk but give low and stable returns. The trick is to produce a diversified portfolio that maximises returns while minimising risks.

Patient receiving treatment at a medical centre. In Malaysia, whole life insurance and takaful products are among the most popular.

This interplay between risk and return and economic conditions can be seen in the investor strategy of insurers. Over the nine-year period between 2009 and 2017, the risk appetite of insurers underwent a sea of change as the economy reversed from a downturn and shifted into higher gear. In 2009 68% of the industry’s total assets were invested in bonds – 15% in government bonds/guaranteed loans and 53% in corporate bonds. This flight to safe havens is understandable since the economy had contracted by 1.5% in 2009.

However, by 2017 the economy had turned around and registered a growth of 5.9%. Insurers dumped their conservative strategy and moved their money into higher-yielding assets to improve their risk-adjusted returns on capital. Correspondingly, the share of government papers ebbed to 11% while private bonds jumped to 62% and the share of higher return and risk assets, classified as other investments (mostly equities), grew from 2.5% to 6.6%.

Back in 2009, BNM had relaxed the ownership requirements for foreign insurers to purchase local operators. This was to encourage fresh capital and to consolidate the industry. The bar for foreign equity ownership was set at 70% (from 49%) but BNM allowed higher foreign shareholding on a case-by-case basis, but nonetheless with the 70% equity threshold having to be eventually met.

The lifting encouraged a flood of new money into the sector. Between 2010 and 2016, 20 mergers and acquisition deals valued at about RM16bil were inked, mostly in the general insurance sector.12 While the entry of foreign insurers reinvigorated the industry, the central bank felt the foreign insurance industry had ignored the lower-income group.

Only 4% of lower-income households are protected by life insurance or family takaful and the B40 penetration rate was at a paltry 30.3% (2016), compared to the national penetration rate of 50.4% (2017).

Its patience worn thin, BNM, in June 2017, reminded wholly owned foreign insurers and takaful operators to honour their commitment to reduce their stake to 70%, and set a June 2018 deadline for the errant parties to comply.13 Business daily The Edge reported that 11 wholly owned foreign insurers such as Tokio Marine, Chubb and AIA would be affected by this ruling.

Analysts speculate that foreign insurers may choose several options, such as tie-ups with strategic institutional investors or sell a portion of their shares to the public through a listing exercise.

Irrespective of the outcome, the insurance industry in Malaysia has come a long way, but it is still a work in progress. It will be a while yet before it can be considered to be on par with its counterparts in more developed countries.

1As of 2 June 2018, only two composite insurers remain after Takaful Malaysia split their operations. Bank Negara Malaysia 2017 Annual Report.
2A reinsurer is an insurer who provides insurance to insurance operators.
3DBS Group Research, 7 September 2017.
4 (measured as the ratio of total number of life insurance and family takaful policies in force to the total population).
5BNM 2017 Annual Report. Malaysia’s per capita spending on life insurance of US$330 is lower than the world average of US$373 or seven to 12 times lower than the amount spent in Singapore, Japan and Hong Kong.
6BNM 2017 Annual Report.
7The B40 group denotes the bottom 40% of the population whose monthly household income is RM3,900 and below.
82012 Underinsurance Report by Life Industry of Malaysia and Universiti Kebangsaan Malaysia, December 2013.
9The morality protection gap is defined as the difference between the resources needed and the resources that would be available to maintain the living standards of dependents following the death of the primary wage earner.
10Includes Life and General, Conventional and Takaful
11Malaysia’s 2017 GDP is RM1,173 billion. For 2015, Malaysia was at 20.7% compared toSingapore’s 42.4% (2017 numbers unavailable).Source:!ds=28lf2rg=3d.17.h&display=line
12DBS Research September 20, 2017.
13However, news reports suggest this deadline may be deferred.

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