KUALA LUMPUR, Sept 29 — The overall profitability of the insurance and takaful sector was lower in the first half of 2021 (1H2021) compared to 1H2020 due to weaker investment performance.
According to Bank Negara Malaysia’s (BNM) ‘Financial Stability Review – First Half of 2021’ report released today, excess income over outgo for life insurance and family takaful funds declined to RM3.7 billion during the period, compared to RM4.7 billion in 1H2020.
The central bank attributed the performance to net unrealised losses from bond investments in line with the weaker bond market performance — and, to a lesser extent, mark-to-market equity investment losses.
“However, income from underwriting activities have provided some support to profitability, while growth of new business premiums recovered strongly at 30.2 per cent (1H 2020: -7.1 per cent), primarily driven by the investment-linked, Mortgage Reducing Term Assurance/Takaful (MRTA/MRTT), and medical and health business segments.
“This reflected the resumption of face-to-face product sales and property market activity as a result of less restrictive containment measures up until end-May,” BNM said.
The insurers and takaful operators (ITOs) have also observed an increasing awareness among Malaysians on the important role that insurance and takaful can have in providing a financial safety net in times of uncertainty.
BNM said this growing awareness is expected to provide some lift to demand for insurance and takaful products despite near-term pressures on household incomes.
Nevertheless, the impact on life and family ITOs from the temporary relief measures granted to policyholders remained limited, it said.
The central bank noted that affected policyholders have been afforded the option to defer premium payments due under life insurance policies and family takaful certificates for three months, without interruption in their coverage.
This option, previously slated to expire by June 2021, has been extended until December 2021.
The number of policyholders opting for the premium deferment option has continued to increase, although the amount of premiums deferred and covered by premium holidays remained relatively small at 8.3 per cent of premiums in force (June 2021: 7.7 per cent; March 2021: 6.5 per cent).
“Going forward, financial market volatility and prospects of rising bond yields will continue to weigh on earnings of ITOs, given their sizeable financial investments.
“Nonetheless, the insurance and takaful sector is expected to remain resilient. A sensitivity analysis conducted on the balance sheet of ITOs shows limited impact to their solvency positions in the event of a sharp rise in bond yields, underpinned by the strong capitalisation of ITOs,” BNM said.
It noted that the aggregate industry capital adequacy ratio of 221.2 per cent remains well above the regulatory minimum of 130 per cent.
“All ITOs also continued to maintain capital ratios above their internal capital target levels that range between 150 per cent and 250 per cent.
“As at end-June 2021, aggregate excess capital buffers above the regulatory minimum stood at RM36.8 billion, and stress tests conducted on insurers also affirmed their ability to withstand severe potential shocks,” it said.
CALLS FOR ITOs TO IMPLEMENT RE-PRICING MEDICAL INSURANCE/TAKAFUL BUSINESS
BNM has required ITOs to implement the re-pricing of medical insurance/takaful business exercises in an objective and fair manner, based on actual past claims experience and expectations of future claims experience that are reasonable and supportable.
It noted that similar to other countries, the cost of medical services in Malaysia has been increasing at a much faster pace than general price inflation.
The claims cost is also affected by changes in the utilisation of healthcare services by policyholders, which may arise from demographic shifts and changes in lifestyle and behaviours.
All these assumptions are combined to derive the expected claims cost which determines the required level of premiums.
BNM said prior to COVID-19, it was also concerned when ITOs delayed re-pricing exercises for too long as a competitive strategy.
“Lengthy delays are likely to result in sharp and unexpected premium adjustments subsequently to catch up with claims inflation.
“This may leave policyholders who are unable to afford the higher premiums with limited options to obtain replacement coverage due to advancement in age or changes in their health status,” it said.
BNM said to promote fairer outcomes for policyholders, ITOs are required to establish an internal policy to govern the medical re-pricing exercise, which includes setting out objective indicators and thresholds used by ITOs to trigger re-pricing, as well as the methodology used to determine the new price.
The central bank is also reviewing existing regulations to allow more flexibility for ITOs to moderate the extent of re-pricing required for smaller product portfolios that may be more likely to experience greater volatility in claims experience.
“Over the longer term, containing medical claims inflation, which is a major driver of re-pricing, remains a key priority to preserve sustainable access to medical reimbursement coverage from private ITOs.
“This requires a concerted effort from multiple stakeholders — including healthcare providers, regulators, ITOs, support service providers, and end-consumers — to deliver longer-term reforms in the delivery and consumption of private healthcare services,” it added.