Fitch Ratings: More consolidation in Malaysian insurance, takaful industry

KUALA LUMPUR: Fitch Ratings expects possible further consolidation in Malaysia’s life insurance, general insurance and takaful sector due to new insurance regulations and a takaful capital regime.

It said on Tuesday the introduction of a risk-based capital regime for the takaful sector and the requirement for composite insurers to segregate their operations into separately licensed life and general insurance units could initiate another round of market consolidation, especially in the takaful sector.

“Composite insurers and takaful operators are likely to dispose of parts of their insurance operations if the cost of additional capital burden as a result of the rollout of these regulatory measures outweighs the return they are able to generate,” the ratings agency said.

In its report on the sector and rating for Malaysia's life insurance, general insurance and takaful sector, it said the outlook remains stable.

“Market growth, sound operating margins and adequate capital buffers will continue to reinforce the credit profile of insurers or takaful operators, although there is likely to be further consolidation due to the enactment of new insurance regulations and a takaful capital regime,” it said.

Fitch said demand for insurance products was likely to continue to grow in the near term because of steadily rising disposal incomes and private consumption.

It expected growth in the family takaful sector to remain strong as takaful operators further expand their product reach and offerings.

However, less volatile equity markets and a low interest rate environment will sustain the demand for investment-linked policies.

“In light of the existing fire tariff system, Fitch expects the underwriting margin of the non-motor business to remain favourable, buffering underwriting volatility from motor insurance.

“Adverse claim results from mandatory motor insurance, however, will persist in the coming year, although insurers have been allowed to gradually make adjustments on premium rates since January 2012,” it said.

Fitch said the revision of the Sector and Rating Outlooks to Negative could occur if insurers suffer material capital loss due to severe equity market volatility.

It added significant deterioration in underwriting loss from third-party bodily injury and death motor insurance could lead to a change in the general insurance sector's Outlook to Negative.

Conversely, a Positive Sector Outlook could be considered if the motor insurance sector's operating margin improves following further relaxation of compulsory motor pricing rules, while margins in the non-motor segments remain intact.