Insurance sector to stand firm against Covid-19 repercussions
KUCHING: RAM Ratings maintains a stable outlook on the Malaysian insurance sector for 2020, believing the sector will stay resilient despite the considerable economic impact of the Covid-19 pandemic.
It said the strong capitalisation of insurance players is anticipated to sufficiently cushion the impact of heightened financial markets volatility as well as higher capital charges amid low interest rates and mounting credit stress.
“However, we caution that downside risks remain as there is a high degree of uncertainty over the momentum of the coronavirus’ spread and its ultimate global peak. Our industry outlook may be revised if the extent of the economic impact exceeds our current expectations,” it said in a statement yesterday.
As at end-December 2019, the life insurance and family takaful sectors’ preliminary capital adequacy ratio (CAR) stood at a strong 207 per cent, which RAM said was equivalent to 1.6 times the minimum requirement.
Similarly, the general insurance and takaful sectors boasted robust CAR of 283 per cent.
Additionally, Bank Negara Malaysia’s sensitivity analysis indicated that the life insurance sector is expected to remain resilient with the industry’s CAR sustaining above the prescribed regulatory level of 130 per cent even under a scenario of 200bps parallel decline in interest rates.
As part of the government’s economic stimulus package to soften the repercussions of the crisis, life insurance policyholders and family takaful participants will have the option of deferring regular premium payments for three months without affecting their coverage.
The financial impact from this relief measure, available from April 1 to December 31, 2020, should be manageable for industry players.
“The mounting risks arising from more volatile financial markets and heightened credit stress amid the economic downturn will affect the insurance industry,” highlighted Sophia Lee, RAM’s co-head of Financial Institution Ratings.
“However, most insurers have been conservative in their investment strategies, with the bulk of these asset constituting highly rated bonds.
The equity portfolios of the top 10 life and general insurers, which account for over 90 and 70 per cent of their respective industries by assets, stood at just 15 and three per centof their respective overall invested asset portfolios as at end-June 2019,” Lee added.
A protracted low interest rate environment will also put pressure on life insurers’ capital adequacy.
Notably, most life insurers in recent years have been selling more investmentlinked (IL) products, which pass on investment risks to policyholders and a ract lower capital requirements.
IL products constituted about 56 per cent of life players’ in-force business in 2019.
“The economic implications from the pandemic will cripple the growth of insurance premiums this year, before any rebound can be anticipated in 2021.
Based on historical data, new business for the life insurance sector contracted 4.6 per cent during the global financial crisis in 2008, and 10.2 per cent amid the Asian financial crisis in 1998.
“In 2019, the life insurance industry’s new business premiums expanded 14.2 per cent to RM11.8 billion, driven by stronger sales of IL and endowment policies.
Despite near-term growth challenges, RAM expects the life business to be supported by Malaysia’s favourable demographics and healthy demand for medical coverage in the long run, further li ed by significant medical cost inflation.
“The contraction of general insurance premiums is expected to be more pronounced in 2020, taking into account the challenging economic conditions and the gradual effects of tariff liberalisation for the motor and fire segments.”