KUALA LUMPUR (April 23): The takaful industry will not be spared from the impact of the virus-driven economic slowdown in 2020, while players grapple with increased volatility and rising credit risks to their investments, said RAM Rating Services Bhd.
A protracted low interest rate environment will also strain the capital position of operators, if the negative duration gap between assets and liabilities widen.
"However, the economic impact of the health crisis, while severe, is viewed as temporary and gradual recovery is expected by year-end. Takaful operators’ robust capitalisation is envisaged to help them navigate the crisis," RAM Ratings said in a statement today.
As such, it is keeping its stable outlook on the Malaysian takaful industry this year, though it cautioned downside risks remain given the high degree of uncertainty over the momentum of the COVID-19 spread, and its ultimate global peak.
“That said, given heightened uncertainties and still-evolving challenging macroeconomic conditions, growth in the family and general takaful industry is expected to weaken significantly in 2020,” said RAM Rating's co-head of financial institution ratings, Sophia Lee, as she noted how the family takaful business saw slower growth of 10% during the 2008 global financial crisis versus 33% in 2007.
Family takaful's new business contributions grew 25% to RM6.2 billion in 2019 versus 13% in 2018, mainly driven by the MySalam initiative.
Excluding MySalam, growth was estimated at 16%, supported by credit-related takaful products and the employee benefit group business. The general takaful industry, meanwhile, grew 20% in 2019, led by the motor business.
While family takaful profit had more than doubled to RM3.8 billion in 2019, the ratings agency expects profitability in 2020 to be softer in view of a subdued topline and downside pressure on investment income due to volatile capital market movements in recent months.
The profitability of the general takaful business is also expected to be strained in the tough economic environment as the segment has seen thin net underwriting margins.
However, this should be cushioned by the industry’s investment income, said RAM Ratings, as the segment has limited exposure to the equities market and may record some gains from its fixed income portfolio, considering further overnight policy rate (OPR) cuts in 2020.
It also said the recent spike in Malaysian government security yields despite the two OPR cuts in the first quarter of the year was likely a knee-jerk reaction that was triggered by investors shifting their investments to safe-haven assets amid the crisis, and that it should retreat on account of further monetary policy easing.
Notwithstanding the headwinds, the strong capitalisation levels of the family and general takaful industries should enable them to withstand the impact of the crisis, it stressed. Data showed that the industries’ capital adequacy ratios stood at 194% and 293% respectively as at end-June 2019, above the minimum regulatory requirement of 130%.
“Bank Negara Malaysia’s sensitivity analysis further indicates that the life insurance sector will stay resilient, with the industry’s capital adequacy ratio sustaining above the required 130% even in a scenario where interest rates register a 200-basis point parallel decline,” it added.