The Insurance Annual Report 2005

Bank Negara Malaysia (the Bank) released the Insurance Annual Report 2005 today.

2. The Insurance Annual Report 2005 provides a review of the administration of the Insurance Act 1996 as well as the performance and development of the Malaysian insurance industry in 2005.
   
   
   Performance of the Insurance Industry
   
   
3. The insurance industry continued to register positive growth in 2005, buoyed by stronger growth in the general insurance sector. Combined premium income for life and general insurance business expanded by 6.9% to RM23,564.6 million (2004: 17.2% to RM22,041.9 million). The general insurance sector benefited from sustained economic activity and strong private consumption. While growth moderated in the life sector, demand conditions during the year have remained positive with the improving risk awareness and increasing affluence of the population. Overall, operating results remained favourable for both life and general businesses, supported by improved underwriting results, higher productivity, greater economies of scale, as well as the more efficient utilisation of capital, particularly among general insurers. Efficiency gains were also observed as a result of more effective cost controls and reduced intermediation costs achieved through the penetration of bancassurance and direct distribution channels.
   
   
4. The level of insurance coverage continued to expand in 2005. Market penetration (measured in terms of life policies in force to the total population) deepened further to 38.7% (2004: 37.9%). The higher penetration in the life sector and increase in demand for general insurance, in turn, supported further increases in per capita spending on insurance. Total assets of the insurance funds expanded by 11.4% to RM96,742.8 million in 2005 (2004: RM86,852.4 million), with a sset allocations to corporate and debt securities continuing on an upward trend to account for 49.9% (2004: 46.5%) of total insurance fund assets as insurers adopted more active investment strategies to optimise yields and reduce maturity mismatches.
   
   
   Life Insurance
   
   
5. New business growth in the life sector slowed to 0.6% (2004: 37.3%) in 2005, mainly due to the scaling back of new sales of capital-guaranteed investment-linked insurance products by life insurers. Notwithstanding this, demand for protection and regular savings products remained resilient with the continued expansion in bank lending activities during the year, as well as an increasing awareness among the public of financial risk exposures and the need to make adequate provisions for current and future financial needs. This provided support for continued positive growth in premiums generated from insurance savings and protection products, including whole life, endowment, term life and medical and health insurance policies.
   
   
6. A more diversified distribution system for life insurance continued to evolve in 2005. Bancassurance remained a major distribution channel alongside the agency force, respectively accounting for 45.3% and 49.4% of total new business in the life sector. During the year, legislation was also passed to provide for the introduction of financial advisers, paving the way for further diversification in the distribution system. Financial advisers will form a new category of professionally qualified insurance intermediaries who will be strategically positioned in the market to advise consumers on a wide range of financial solutions, including insurance, to meet their financial objectives.
   
   
7. Despite the slower premium growth and weaker investment returns, the life sector maintained continuing profitability in 2005. Total excess of income over outgo for the year amounted to RM9,939.9 million (2004: RM10,984.4 million), supported by improved efficiency gains achieved through lower intermediation costs and increasing economies of scale derived from bancassurance strategies. Investment conditions, however, remained challenging for life insurers. The investment yield excluding capital gains for the industry as a whole remained relatively flat at 5.7% (2004: 5.8%), while the yield including capital gains declined to 6.5% (2004: 8.4%) following capital losses incurred on insurers' equity portfolios.
   
   
8. Total assets of life insurance funds continued to expand at a double-digit rate of 12.9% (2004: 15.9%) to reach RM78,753.4 million in 2005. Investments in corporate and debt securities rose to RM42,096.1 million at book value, accounting for 53.4% of total life fund assets. Mortgage loans increased to form a larger component of life fund assets, as an alternative investment strategy adopted by a number of insurers to mitigate maturity mismatches and associated reinvestment risks within the life fund. Investments in foreign assets also increased following the liberalisation of foreign exchange administration rules in 2005 which expanded opportunities for insurers to enhance investment yields and access longer term investments from international financial markets.
   
   
9. Market penetration, measured in terms of the total number of life policies in force to the total population, continued to improve steadily to 38.7% (2004: 37.9%). The life insurance industry also continues to play an important role in the mobilisation of domestic savings, with the ratio of premium income to gross national savings remaining above 9% (2005: 9.1%; 2004: 9.6%). Demographic changes leading to a growing ageing population will continue to stimulate demand for life insurance as a financial planning tool, particularly to meet individual financing needs for medical expenses and during retirement. At the same time, greater product diversity, the proliferation of alternative distribution channels and regulatory measures taken to improve returns and benefits to policy owners will reinforce conditions for the life industry to expand its market reach.
   
   
   General Insurance
   
   
10. The general insurance sector expanded strongly in 2005. Gross premium growth achieved 9.7% to reach RM9,386.1 million, with higher premiums recorded in all classes of business in the general insurance sector 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% (2004: 6.8%), its most significant growth since 2000, following the surge in motor vehicle sales during the year. Strong growth in marine, aviation and transit (MAT) insurance premiums which expanded by 15.3% (2004: -3.1%), largely from aviation and offshore oil-related risks, also bolstered overall growth. The fire, CAR and engineering insurance sectors, however, saw slower growth with the continued softening of premium rates on industrial fire risks and subdued construction activities during the year.
    
    
11. The industry's overall net retention ratio rose for the second consecutive year to 88.8% in 2005 (2004: 87.6% ) , mainly due to the increase in motor business which is significantly less reliant on reinsurance support. At the institutional level, retention ratios registered by individual insurers also improved with the implementation of further reductions in voluntary cessions to Malaysian Reinsurance Berhad as part of measures to promote a more competitive reinsurance market. General insurers were also more capital efficient, with the ratio of net premiums to shareholders' funds increasing significantly to 112.8% (2004: 99.7%) and correspondingly fewer insurers operating at sub-optimal levels. During the year, efforts were continued to enlarge domestic capacity to absorb a higher proportion of large risks, which in turn will contribute towards reducing domestic exposures to global insurance cycles.
    
    
12. The overall claims ratio improved significantly to 55.4% in 2005 (2004: 60.9% ), with improvements observed across the board in all classes of business. Contributing factors included smaller insured exposures, improvements in risk management and security measures put in place by risk owners, and continued underwriting discipline maintained by insurers. The favourable claims experience coupled with robust premium growth during the year saw total underwriting profits more than double to RM956.3 million, or 13.1% of earned premium income (2004: RM464.6 million or 6.9% of earned premiums). Operating profits correspondingly increased to RM1,524.4 million, up 29.3% from 2004. The technical components of profitability continued to strengthen, with the underwriting account contributing a significantly higher share of 62.7% (2004: 39.4%) of operating profits.
    
    
13. Future growth prospects for the general insurance industry are expected to remain strong in 2006 with the positive outlook for the domestic economy, and stabilisation as well as some increase in premium rates anticipated for certain commercial lines of business arising from the follow-through effects of the 2005 hurricane losses in the United States .
    
    
    Policies and Measures to Strengthen the Insurance Industry
    
    
14. Policy measures in 2005 were focused on strengthening the resilience of the insurance sector, evolving a more competitive market and further improving market practices. Significant progress was also achieved in advancing towards a more robust prudential framework and supervisory regime.
    
    
15. The competitive structure of the insurance industry was further enhanced during the year with the passage of legislation in October 2005 providing for the introduction of financial advisers in the insurance industry. This, together with the continued growth of bancassurance will further increase opportunities for broader participation by smaller insurers in the market. Following the liberalisation of foreign exchange administration rules, life insurers were also allowed to sell education and investment-linked policies denominated in foreign currencies, thereby providing additional avenues for product innovation and a greater degree of diversity in the market.
    
    
16. Institutional capacity building remained a high priority to ensure that insurers are well-placed to cope with more competitive market conditions and complex risk dimensions emerging in the industry. In this respect, emphasis continues to be given to sound corporate governance led by effective boards, promoting a strong risk management and internal control culture within insurers, and strengthening the accountability of auditors and actuaries in supporting prudent financial practices and reliable valuations. In the development of technical expertise, particular focus has also been directed at strengthening the internal investment management capabilities of insurers by requiring active dealers of insurance companies to be suitably qualified and subjected to professional codes of conduct for wholesale market operations.
    
    
17. These initiatives contributed towards reinforcing the prudential foundations that enabled the Bank to introduce further deregulatory measures in the area of investment management during the year. As a measure to improve investment performance and enhance the asset-liability structures of life insurance funds, insurers were allowed a higher limit for investments in credit facilities (inclusive of private debt securities) for the purpose of supporting their solvency requirements. Greater flexibility was also accorded for insurers to achieve a more diversified portfolio of property investments with the inclusion of investments in private real-estate funds and single-purpose property holding companies as admitted assets for solvency purposes. For investment-linked insurance funds, a higher limit was also provided for investments in foreign assets, together with greater flexibility for insurers to engage in derivative transactions for yield enhancement purposes and to hedge foreign currency exposures.
    
    
18. A more robust approach to regulation and supervision based on sound risk assessments continued to be put in place. The Bank's supervisory assessment and rating processes were further refined to sharpen the focus on institution-specific risks under the risk-based supervisory framework approach which was adopted in 2004. At the same time, progress on the implementation of a risk-based capital framework for the insurance industry advanced forward with the issuance of a second concept paper setting out details of the new methodology for determining an insurer's capital adequacy requirements, revised valuation basis for insurance liabilities and supervisory expectations concerning the supporting institutional risk management and governance framework that insurers will need to have in place. Following feedback and test results from the industry, the framework will be finalised for expected implementation in 2008.
    
    
19. Initiatives to further improve market practices focused on promoting the fair treatment of consumers and improving product disclosures. With this in view, guidelines on investment-linked and medical and health insurance business were issued to improve transparency in the sale of such products and enhance benefits to consumers. Enhanced disclosure requirements were also introduced for general insurance products. To complement these initiatives, the InsuranceInfo consumer education programme for the insurance and takaful sectors has been intensified to enhance the programme's visibility and reach, while the outlets for the programme's various activities continued to receive an encouraging public response.
    
    
20. In the general insurance sector, institutional mechanisms continued to be strengthened to support the gradual transition towards pricing deregulation and improved underwriting and claims processes. ISM Insurance Services Malaysia Berhad, formerly a unit of Persatuan Insurans Am Malaysia, was incorporated as a separate and independent entity in February 2005 to provide general insurers and takaful operators with statistical data and quantitative benchmarks, as well as IT and research and development services. The general insurance industry also successfully launched the Independent Vehicle Valuation Database during the year to serve as an authoritative reference point for the objective valuation of passenger vehicles for the purpose of determining the amount of sums insured and claims compensations at the point of insurance purchase and claims settlement respectively.
    
    
21. Going forward, 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. Particular emphasis will be accorded to ensuring an orderly transition to the new capital and financial reporting regimes, further strengthening incentives for sound financial and business practices, and providing a conducive yet effective regulatory and supervisory environment that promotes both institutional and industry competitiveness and resilience. While allowing market-led adjustments to proceed as far as possible, the Bank will continuously strengthen its monitoring and surveillance capabilities to ensure that the adjustments do not result in market instability or undermine public confidence in the insurance sector.

See also: The Insurance 2005 Annual Report (Book)