Life Insurance - Malaysia M&A

The financial sector liberalisation, introduced in April 2009, has set the stage for further consolidation in the insurance, takaful and Islamic financial landscape as competition intensifies with the emergence of foreign players in the market.

The need for adequate capital, good governance and risk management practices are other pertinent factors that have heightened the merger and acquisition (M&A) trail in the financial services sector.

Industry observers say the easing of restrictions on foreign ownership of Malaysian insurers to 70% from 49% effective last year under the financial sector liberalisation plan and the introduction of the risk-based capital (RBC) framework will likely see more M&A activities in the pipeline.

The move to allow foreigners to hold a 70% stake in insurance companies also applies for Islamic banks and takaful operators. The RBC framework, which was launched in January 2009, is aimed at ensuring insurance companies have ample capital to undertake risks in their daily operations.

According to Sta Maria, the smaller and less profitable insurers will continue to be targets for acquisition, especially by foreign insurers interested in penetrating the Malaysian market with the relaxation of foreign equity participation on a case-by-case basis for companies that can facilitate industry consolidation.

While adequate capital under the framework is good for an insurer or takaful operator as it allows for diversification and acceptance of higher business and investment portfolio risks, Sta Maria says what is more important is the placement of robust governance and risk management practices, adding that this will ensure resilience of the company in the event of a financial crisis.

Takaful Ikhlas CEO Datuk Syed Moheeb Syed Kamarulzaman feels organic growth is important but to expand fast it will be better for takaful to merge.

Takaful Ikhlas Sdn Bhd president and CEO Datuk Syed Moheeb Syed Kamarulzaman says organic growth is important but to expand fast it will be better for takaful to merge as its penetration rate as at June last year was around 10.3%. He says he expects a flurry of new M&As to arise when the proposed RBC framework for the takaful industry comes on stream in the near future.

Moheeb, who is also the chairman of the Malaysian Takaful Association, in a recent news report said this would lead to consolidation as some takaful operators might need to inject new capital under the proposed framework to maintain their licence to operate, resulting in the smaller ones to consolidate.

He adds that the takaful industry can expect a double-digit growth in 2011 of total net contribution. In 2010, the industry grew at 23.2%. Besides this, Moheeb sees more investment-linked products and products with affordable contributions.

Meanwhile, Syarikat Takaful Malaysia Bhd (STMB) group managing director Datuk Hassan Kamil feels that for takaful, it would be better to grow organically as the companies are too young to merge since their systems and processes have yet to mature and work efficiently. They need more time to build a strong foundation to merge, he says.

Hassan adds that although there is strong potential in the takaful business, nonetheless talent shortage and staff turnover is the main concern besides intense competition among takaful operators leading to “suicidal” and not sustainable rates for the general takaful commercial insurance.

As a result, some takaful operators are suffering losses or low underwriting surplus due to reckless underwriting and pricing, he adds. For takaful to grow, Hassan says, there should be proper framework and prudent management in the industry as the takaful base is still small compared with conventional insurance.

ING Insurance Bhd president and CEO Datuk Dr Nirmala Menon feels that the takaful industry has still got a long way to go and should focus on penetration of the underserved Muslim population.

For this to happen effectively, she adds there needs to be an emphasis on consumer education.

Given where Malaysia is, both in terms of penetration and spend by GDP, Nirmala believes there is ample opportunity for the industry to grow in the coming years as awareness and disposable income improve and age advances.

Abdull Aziz says for Islamic banks to grow, they need to venture beyond the traditional markets and establish footholds in emerging markets like Indonesia, Singapore and Thailand.