Malaysia warns of downside risks for insurers from market volatility

Overall profitability of ITO funds increased in the first half of 2024.

The uncertainty in financial markets poses a downside risk to life insurers and family takaful operators’ (ITOs) earnings looking forward, due to their exposure to bond and equity investments, warned Bank Negara Malaysia (BNM).

Additionally, the increasing impact of climate events, particularly floods, and continued medical inflation could challenge the sustainability of affordable insurance and takaful coverage.

The overall profitability of ITO funds increased in the first half of 2024, driven by strong investments and improved underwriting performance. 

Profitability, as measured by excess income over outgo, reached $1.93b (RM8.4b), up from $0.74b (RM3.2b) in the second half of 2023. This growth was primarily due to net unrealised gains from equity investments, fueled by the strong performance of Bursa Malaysia, along with sustained investment income.

ITOs saw a reduction in net underwriting losses during the period, partly due to seasonally lower maturity and benefit payouts. 

However, medical benefit payouts remained elevated at $1.22b (RM5.3b), unchanged from the second half of 2023 but up from $1.08b (RM4.7b) in the first half of 2023. 

The rising costs were attributed to higher incidence rates of chronic and acute cases, as well as increased medical treatment expenses.

In response, many ITOs have undertaken repricing efforts for medical and health policies, although these adjustments are gradual, taking effect at policy anniversaries.

To manage medical inflation, the revised policy on Medical and Health Insurance/Takaful (MHIT), issued by BNM in February 2024, will require ITOs to offer co-payment options starting September 2024. 

This is expected to improve affordability and align healthcare utilisation with consumer needs, complementing broader healthcare reforms pursued by the government.

Growth in new business premiums also bolstered profitability, expanding by 11% in the first half of 2024, compared to just 2% in the same period in 2023. 

This was mainly driven by medical, health, and investment-linked products, offsetting the continued decline in participating life insurance. Policyholders have increasingly shifted from participating policies to alternative investment-linked and non-participating policies.

In the general insurance and takaful sector, operating profits were steady at $0.39b (RM1.7b) in the first half of 2024, compared to $0.41b (RM1.8b) in the second half of 2023 and $0.30b (RM1.3b) in the first half of 2023. 

Growth in gross direct premiums, particularly from the motor segment, contributed to this stability, driven by strong car sales and new model launches, including electric vehicles. 

However, higher provisions for motor claims, rising repair costs, and lower claims from flood events also influenced underwriting performance.

($1.00 = RM4.27)