This article first appeared in The Edge Financial Daily on March 6, 2020

Insurance sector
Downgrade to neutral: Concluding the fourth quarter of financial year 2019 (4QFY19) earnings season of insurance companies under our coverage, we noticed that its net earned contributions (NEC) and net earned premiums (NEP) as well as earnings were experiencing tapering growth or a decline. This trend was particularly more discernible with general insurance companies, possibly due in large part to the detariffication of the motor and fire insurance class.

We are of the view that this might indicate that the insurance sector might be entering a soft market cycle. Note that the characteristics of a soft market include: i) lower insurance premiums, ii) broader coverage and relaxed underwriting criteria; and iii) increased competition and capacity.

Thus, a soft market will put a downward pressure on bottom lines of insurance companies as premium is the main revenue source. Factors fuelling the soft market could comprise softening macroeconomic indicators, low insurance penetration rate, deregulation of the general insurance industry, increased number of insurance providers and products.

The overall insurance and takaful sectors’ aggregate capital adequacy ratio of 230% was well above the regulatory minimum of 130% as at end June 2019. Moreover, the profitability of the overall insurance and takaful sector has been improving driven largely by the higher growth of net premiums and contributions in the life insurance and family takaful segments. This was predominantly attributable to improved sales of non-participating endowment policies via bancassurance arrangements, and higher contributions from medical and health takaful products for the lower income segment.

While the minimum allocation rate which came into effect on July 1, 2019 for life insurance is expected to affect new business growth and profitability of investment-linked products (ILP), we believe the growth will be partly sustained by the insurance tax relief of RM3,000 and the increasing popularity of ILP. To recall, the ILP accounted for 59% and 36% of the new business growth for life insurance and family takaful segments respectively in 2019. Moving forward, we opine that the growth in the insurance sector will largely come from the life segments as compared to non-life which is going through a transition period towards a liberalised market.

Consequently, the possible lower premium pricing and higher expenses might soften the underwriting margin of insurers under our coverage as it vies for market share in the anticipated increasingly competitive insurance industry. We also postulate that the expected further de-tarrification of fire insurance will be putting further downward pricing pressure on the general insurers — MIDF Research, March 5