KUALA LUMPUR: Fitch Ratings expects the level of merger and acquisition (M&A) activities within undercapitalised insurer and takaful operators among Malaysian operators will persist in the near term.

In a new report released yesterday, Fitch said ongoing regulatory developments will enhance the Malaysian insurance sector’s global competitiveness as it transitions into a liberalised market.

Fitch said with intensified competition, undercapitalised insurers and takaful operators are likely to seek strategic investors or alternative capital to meet their capital needs.

“Fitch believes the level of M&A activities will persist in the near term, given the attractive growth prospects in Malaysia’s insurance industry,” the international rating agency said.

With the implementation of the Financial Services Act 2013 and Islamic Financial Services Act 2013 last year, composite insurers and takaful operators have to relinquish their composite licences, which would split the life, family and general businesses into different entities. Operators are given five years to comply with this.

Fitch said general insurers’ underwriting performance is expected to remain steady due to favourable margins in fire and non-motor classes.

“This will offset the pressure from adverse claims experience in the compulsory motor class despite gradual tariff increases over the years. The claims exposure from the two airplane mishaps in 2014 and major flooding in December 2014 are likely to be manageable for the industry as a whole, given the relatively low penetration ratio,” it said.

Fitch does not expect the adoption of the goods and services tax from April to adversely affect the industry’s performance, and believes that premium growth will remain stable overall, underpinned by growing disposable incomes, rising consumer awareness and risk sophistication.

“Broader distribution networks and new product offerings by insurers and takaful operators will continue to support the industry,” Fitch said.

This article first appeared in The Edge Financial Daily, on April 21, 2015.