Insurers might experience margin compressions in initial stages of MAR
KUALA LUMPUR: With the implementation of Minimum Allocation Rate (MAR) for investment-linked (IL) products starting January 2019, analysts believe that insurers might experience slight margin compression or asset reduction in the beginning stages.
According to the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) in its insurance and takaful sector update, implementation of MAR for IL products marks the end of Phase 1 of the Life Insurance and Family Takaful Framework to replace the removal of maximum limits on commission and agency-related expenses (ARE).
MIDF Research noted that insurers need to have a minimum portion of premium to be retained in the unit fund before any charges -- such as commissions and management expenses -- can be made by insurers.
“This would reduce the margin available in the earlier years to pay for front end expenses, predominantly the commission to the agency force,” the research arm said.
“We opine that given the industry’s reliance on agents (circa 48 per cent), insurers would be expected to take a meticulous approach in revising the incentive structure or rationalise its distribution network in meeting the regulatory requirement.
“It is likely that insurers might experience slight margin compression or asset reduction in the initial stages.”
MIDF Research recalled that IL products accounted for circa 44.5 per cent and circa 21 per cent of new premiums or contributions in life insurance and family takaful sector respectively.
The research arm thus viewed that the impact would be greater on the life insurance companies as compared to takaful operators.
On another note, MIDF Research highlighted that digitalisation remains an important driver in the industry.
“In the face of ongoing deregulation and pricing pressure, we view that insurers with a key focus on digital technology in its business model may provide further impetus to ensure profitability moving forward.
“The domestic claims environment has been favourable but management expense has been on the rise in recent years partly due to meeting the structural demand of the industry such as online distribution and mobile first approach.”
MIDF Research believed that this trend will continue in current year 2019 (CY19).
“However, we view this as only transitional, whereby the decline in average industry underwriting profitability is to achieve greater cost savings in the long run.
“Hence, we believe that the industry will maintain a positive and relatively healthy average underwriting margin due to prudent underwriting.”
Additionally, the research arm viewed the development of micro insurance may continue to be harnessed by digital technology in CY19 through means of online channels as well.