Greater affluence could lead to better insurance penetration in Malaysia, finds Shirish Nadkarni

A single look at Malaysia's capital Kuala Lumpur will convince even the first-time visitor that affluence has made a permanent home in this multi-cultural (Muslim, Chinese and those of Indian extraction) South-East Asian nation. Those who saw KL (as the capital is more widely known in the region) during the turbulent period of the 1980s and early-1990s would be amazed at the sartorial metamorphosis the city has undergone in the course of the last decade. Where there was once a chaotic, crowded, jumbled, dirty city, there is now a world-class metropolis, capable of vying for neatness and elegance with the most beautiful cities of the developed world. The cunningly crafted Petronas twin towers (pictured above) are among the three tallest buildings in the world.

It is not difficult to digest that sustained economic activity and rising incomes have combined to consistently improve the lot of the country's people. They know the value of what they have, and have begun to increasingly appreciate the need to insure their assets.

A buoyant industry

In 2005, the Malaysian insurance industry expanded by a healthy 6.9%, buoyed by stronger growth in the general insurance sector. The combined premium income for the life and general insurance business grew to Malaysian ringgit (RM)23,564.6m ($6,501.95m) from RM22,041.9m ($6,082m) in 2004.

According to the 2005 Insurance Annual Report released by the country's central bank, Bank Negara Malaysia (BNM), the general insurance sector benefited from sustained economic activities and strong private consumption. Gross premiums in this sector grew by 9.7% to RM9,386.1m ($2,589.53m). General Insurance Association of Malaysia (Giam) chairman Hashim Harun, who is UniAsia General Insurance's chief executive officer, is optimistic that non-life premiums will grow by 10% in 2006. Growth in the life sector was more moderate. However, in the context of the increased affluence of the population, there was improved risk awareness.

Operating results remained favourable for both the life and general insurance businesses, with improved underwriting results, higher productivity, greater economies of scale as well as the more efficient utilisation of capital, particularly among general insurers. "Efficiency gains have also been observed as a result of more effective cost controls and reduced intermediation costs achieved through the penetration of bancassurance and direct distribution channels," the central bank's report said.

There were higher premiums recorded in all classes of business, except the contractors' all risks (CAR) and engineering classes. Growth was largely boosted by the higher volume of motor insurance premiums, which increased by 14.4% from 6.8% in 2004, following a surge in motor vehicle sales during the year.

The Malaysian government has been busy promoting the home-grown Proton cars. That certainly has not helped the traffic situation in KL, but the huge growth in the sale of cars has predictably had a salutary effect on the growth in motor policy premiums. Motor insurance, which last year made up 47.2% of the total general insurance premiums, is again expected to drive the market.

The marine, aviation and transit (MAT) insurance sector saw premiums expand by 15.3%, thanks mainly to a growth in aviation and offshore oil-related risks - which also bolstered overall growth. The fire, CAR and engineering insurance sectors, however, saw much slower growth. There was continued softening of premium rates on industrial fire risks and from the subdued construction activities during the year. "Policy measures in 2006 will continue to build on and reinforce the stronger foundations that have been established, as the pace towards further deregulation and liberalisation gathers momentum under the second and third phases of the Financial Sector Masterplan," the BNM insurance report said.

For 2006, the Life Insurance Association of Malaysia (Liam) has projected new business expanding at between 10% and 20% despite the marginal 0.6% growth last year. Some industry executives like Allianz Life Insurance Malaysia Berhad chief executive officer Chris James see the life insurance sector growing faster this year than before. "We would like to see double-digit growth, as currently only four out of ten Malaysians are insured," he said. "Investment-linked products will take a larger share in the market because customers want more transparency, flexibility and control over their investment decisions."

Indeed, it is apparent that the insurance industry in Malaysia has plenty of room to expand. Looking at the numbers alone, it is clear it has a lot of catching up to do. In terms of insurance penetration as a percentage of GDP, Malaysia averages 3.29%, compared with over 8% of GDP in Japan (see table). Insurance penetration levels measured in terms of combined premium income to gross national product softened to 5% in 2005, from 5.2% in 2004. In fact, the 6.9% growth in insurance business as a whole was substantially slower than the 17.2% increase in GNP to RM22.04bn ($6.18bn) in 2004.

Only 38.7% of the Malaysian population had insurance in 2005. As disposable income increases and people accumulate more personal assets, and as insurers come up with more sophisticated products to meet consumers' needs, people are expected to become more aware of the value of insurance. Liam says one of the major reasons for the low penetration rate in Malaysia is the lower disposable income in comparison with Singapore and Japan. It believes an increase in household wealth can motivate individuals to purchase not only one insurance plan but multiple policies.

Popular choices

So which are the most popular insurance products at the moment? Liam says those which have a single-premium endowment and are investment-linked, which feature low-risk premiums and high investment components are the most in demand. "Due to continued convergence of financial markets, growing consumer sophistication and depressed investment conditions following the Asian (financial) crisis, insurance is emerging as an investment alternative, overshadowing its traditional role of protection," Liam says. "This has pushed the growth of the single premium market."

This dominance of single premium was evidenced in the 2005 Insurance Report, where it accounted for 68.8% of the RM6.7bn ($1.85bn) total new business premiums, and more than half of new premiums generated among the majority of life insurers. Investment-linked and ordinary life endowment policies comprised 58.2% of the total new single premiums. "The market in future may see a push for products that include long-term care, annuity, foreign funds, investment-linked plans and universal life," says Koh Yaw Hui, executive vice president and head of customer acquisition (agency management) for Great Eastern Life Assurance (Malaysia) Berhad.

Liam itself has been pushing for the regulators to open up the pension market to allow the Employees' Provident Funds to be channelled into insurance for investments. "This was a major step taken by the Singapore government in 1997," the association says. "With this liberalisation, Central Provident Fund savings accounted for 60% of life insurance business from 1998 to 2002."

Koh is optimistic of the potential for the sector, given the low penetration rate and the growing and young population. "The population is expected to grow at about 1.6% per year, and the total population will reach 28.96 million in five years time," he says. "There is certainly plenty of room to grow. One way to speed up growth is consumer education to raise the awareness of the importance of insurance as both protection and investment instruments." He adds that existing agents can also be transformed into financial services providers, increasing the number of quality insurance agents to expand into the under-served Malay market.

The Federation of Malaysian Consumers Association president Marimuthu Nadason, while agreeing with Koh, says that insurers must do more to provide the right information to potential consumers and not just focus on selling. "With the right information and package tailored specifically to an individual, I'm sure insurers can improve their sales by 30-40%," he says. "It's time insurance companies that are cash-strapped go on a new form of marketing and advertising campaign to reach a wider spectrum of the public."

Insurance firms also need to improve their efficiency and competitiveness in the face of potentially stronger foreign competitors entering the market. Among them are the US-based New York Life Insurance, which had allegedly talked to home-grown MAA Holdings Berhad about a possible merger some six years ago; and Canada's Sun Life Financial. According to Liam, Malaysia's life insurance market liberalisation is quite advanced, with a strong presence of foreign investors. Of the 18 life insurers operating today, of which two are reinsurers, seven (AIA, Allianz, ING, Great Eastern Life, Prudential, Asia Life and Hanover Re) have more than 50% foreign equity. Of the remaining 11 companies, seven (MCIS Zurich, ManuLife, Tahan, Mayban, Uni.ASIA Life, AmAssurance and Malaysian Life Re) have overseas affiliations.

There have been some high profile new entrants in the past 12 months. Insurance Australia Group agreed to acquire an initial 30% stake in AmAssurance Berhad at the end of 2005. The Australian firm aims to increase its stake over time to the maximum allowable foreign ownership level in Malaysia. The recent entry of four new Takaful (Islamic insurance) companies bodes well for the under-tapped industry. According to the Malaysian Takaful Association, the real impact of new players will be from 2007 onwards as they need time to establish their presence in the domestic market. By 2010 takaful is expected to constitute 20% of the total insurance market.

Furthermore, foreign insurers with their large resource base can significantly widen their risk base by expanding into other markets for better returns on investment. Other benefits of having new players around is that foreign insurers tend to have more sophisticated risk classification systems that will force domestic insurers to advance their practices in a competitive market.

Setting the reinsurance scene

Malaysian Reinsurance Berhad, or Malaysian Re, is the de facto national reinsurer and has been the leading organisation in the country for the last three decades of the development of the country's general reinsurance business. It was originally a wholly-owned subsidiary of MNRB Holdings Berhad. In August 2004, in the group restructuring process, the reinsurance business, the reinsurance licence and reinsurance assets were hived off; and the transfer of these assets to Malaysian Re was completed on 1 April 2005.

The company has been actively involved in underwriting treaty and facultative reinsurance for the Malaysian market. It has expanded its business internationally and is actively underwriting business from the Asian, Middle East, Africa and China markets. "We also provide quotes for treaty business; and look after the management of several market pools, like the Malaysian Aviation Pool, Malaysian Motor Insurance Pool, Scheme for Insurance of Large and Specialised Risks and the Sihat Malaysia Scheme that provides a uniform healthcare programme," explains Mustaffa Ahmed, Malaysia Re's executive vice-president and chief operating officer. "We are looking to diversify our existing business in order to achieve a better portfolio mix and ensure sustainable growth."

Then there is Malaysian Life Re, a joint venture between members of the Liam and Reinsurance Group of America. The company, based in KL, aims to offer the most recent life reinsurance products, systems and services to insurers in Malaysia and the Association of South East Asian Nations (ASEAN).

Operating on a more global level is Labuan Re, incorporated in the International Offshore Financial Centre of Labuan, an island off the south-west coast of the East Malaysian state of Sabah, since 14 September 1992. The company's original paid-up capital of $10m has since increased to $150m. It was established as an international reinsurer; and has, over a short period of time, become a major player in the Afro-Asian insurance and reinsurance industry.

Meanwhile, in relation to reinsurance at the international level, BNM expects premiums to rise for certain businesses, following the effects of last year's hurricanes in the US. "This normally happens in the aftermath of a major catastrophe," says Hashim. "However, Malaysia will not be directly affected as there are some risks beyond our capability, which are insured overseas." Such risks, which are non-tariff classes, are large, specialised risks like liability, marine and aviation. However, Alexander Ankel, chief executive officer of Allianz General Insurance, says the final impact has not yet been seen. "The experience of previous years shows that major natural disasters do not necessarily lead to shrinking capacity, thus increasing rate levels," says Ankel. "Somehow it seems that there is always ample reinsurance capacity in the global market."

- Shirish Nadkarni is a freelance journalist.