Life Insurance Marriage Development

A recent $150 million refurbishment of two decades-old geothermal power plants on the Philippine island of Luzon may sound like just another project aimed at overcoming the country's severe electricity shortages. But, for Asia's insurance companies, there is more to it.

Bonds issued to pay for the upgrades and future operation costs, worth 10.7 billion pesos ($213 million), were backed by the Asian Development Bank -- the first such project bonds issued in Southeast Asia, excluding Malaysia, since the 1997 Asian financial crisis.

Investors see infrastructure projects as risky, especially green-field assets that take a long time to bear fruit. But credit enhancement -- backing by a multilateral lender, for example -- helps reduce the risk of default, encouraging institutional investors such as insurance companies and pension funds to put money into them.

"This could be a role model for infrastructure financing in Asia by insurance companies," said Kiyoshi Nishimura, chief executive of Credit Guarantee and Investment Facility, a credit guarantor set up by the Association of Southeast Asian Nations governments plus Japan, South Korea and China. Manila-based CGIF is also backing the Philippine power plant debt, called Tiwi and MakBan Geothermal Power Green Bonds.

The bonds for the Tiwi-MakBan power stations were initially purchased by the Bank of the Philippine Islands. The bank is in discussions to sell off some of the debt to insurance companies, mainly local units of multinational insurers with experience of investing in project bonds in Western markets.

MATCH MADE IN HEAVEN Insurance companies, particularly life insurers, have long investment horizons. That makes them a good match for those with long-term financing needs, such as governments hoping to raise cash for roads, bridges, power plants and the like. Emerging economies in Asia, which have both huge infrastructure demand and a chronic shortage of capital, are banking on help from the private sector.

A recent report from the ADB suggested that emerging Asia needs to invest $26.2 trillion in infrastructure projects, from power generation to transportation, by 2030 to maintain economic growth. Roughly half of that needs to be covered by the private sector, up from the current contributions of an estimated 30%.

"The ASEAN insurance industry, with its stable and long-term financial assets and commitment, can certainly play a greater role in supporting and sustaining our region's economic growth as a whole," Evelina Pietruschka, secretary-general of the ASEAN Insurance Council, told an industry conference last November.

Banks have traditionally been the primary source of cash for such projects. However, stricter capital requirements under the Basel III rules put in place after the global financial crisis have made it harder for banks to make such long-term bets. The regulations, aimed mainly at G-20 countries, are being adopted voluntarily by some emerging economies in Asia, such as the Philippines and Thailand.

Insurance companies, on the other hand, are increasingly hungry for stable, long-term investments as sales of longer maturity life insurance products grow in the region.

Bangkok Life Assurance, a leading Thai insurer, for example, holds 6.87% of the investment units in the BTS Rail Mass Transit Growth Infrastructure Fund, a listed mutual fund that invests in the Thai capital's two big elevated rail lines. The company is hoping to increase its exposure to infrastructure, "but there are not many [bond] issues coming out," said Sanor Thampipattanakul, senior executive vice president of Bangkok Life's investment division.

BARE TOOLBOX Despite the growing appetite for investment, Asia still lacks crucial financial instruments. Malaysia has a liquid debt market for infrastructure that includes project bonds and Islamic bonds, but most of the region remains underdeveloped when it comes to financing.

In poorer countries, such as Cambodia and Myanmar, there are no effective securities markets at all, which makes it difficult for governments and construction companies to raise long-term funds.

But change is coming. Insurance money could foster infrastructure development in the region, and governments are trying to get funds flowing.

The Indonesian Financial Services Authority, for example, issued regulations last year requiring insurers to put at least 20-30% of their investments into government bonds, including those issued by state-owned companies to pay for infrastructure projects. Authorities estimate this could bring in at least 320 trillion rupiah ($23.9 billion).

In India, the government raised the limit on insurance companies' investments in infrastructure funds from 10% to 20%. Philippine President Rodrigo Duterte hopes to tap new funding sources to pay for infrastructure, and wants to create a framework to facilitate insurers' investment in public-private projects.

Malaysia Launched Affordable Life Insurance

Malaysia’s insurance and takaful industry is expected to roll out the development of an insurance starter pack, nationally, for low-income earners, and further develop alternative distribution channels to increase the insurance penetration rate in the country.

In the Financial Stability and Payments Report 2016 released today, Bank Negara Malaysia said the country’s overall insurance penetration remained flat within the range of 54 per cent to 56 per cent over the last five years.

“Affordability and access remain key barriers to higher levels of penetration,” it said.

To address the issue, the report said various innitiatives were introduced, including the requirements for life insurers and family takaful operators to make basic protection products available through direct distribution channels beginning from 2017.

It also noted that among lower income groups, only four per cent of households currently have some form of life insurance or family takaful cover.

“Focus has mainly been directed at lowering distribution costs and simplifying product design and delivery, while ensuring meaningful protection for policyholders,” it said.

It also said that surrender payments over the past four years have increased above the long-term historical average level, raising concerns over sales practices.

“Escalating healthcare costs have also contributed to more frequent repricing activity for medical and health insurance/ takaful products which can increase difficulties faced by policyholders to maintain their policies,” it said.

Hence, it said BNM would continue to take firm action to ensure fair practices by insurers and takaful operators, including requirements for firms to take specific steps to better manage policyholders’ expectations.

“This includes the shift to use plain language policies to help consumers better understand the benefits, exclusions and obligations under insurance and takaful policies.

“By end-2017, more than three quarters of the insurance and takaful policies for personal lines of business are expected to be simplified using plain language,” it added.

Managing Youth Unemployment

Tackling youth unemployment must be made a permanent national agenda with the policies orientated towards equipping the country’s younger generation for an increasingly tough job market.

Bank Negara said socio-economic developments in the past few years have dramatically worsened the state of youth unemployment globally.

The twin developments of persistent high youth unemployment and rising income inequality, it said, could constrain social mobility, and lead to increasing dissatisfaction among the people.

“In Malaysia, this has already contributed, in part, to brain drain – the flight of high-skilled talent to advanced economies and neighbouring countries, in search of better jobs and pay.

“Left unattended, a generation of economically disenfranchised youth could have negative and far-reaching ramifications on the economic and social landscape,” the central bank said in its latest annual report.

In the near future, it said youths were faced with more self-reliant economic arrangements and further job displacements, in line with the advent of wider interconnectedness and rapid technological advancement.

“Thus, policy must be orientated towards preparing the younger generation to meet these challenges head on,” it said.

The central bank stressed that quality education, particularly an effective technical and vocational education and training (TVET) sector was important towards building the country’s human capital.

These goals, highlighted in the Malaysian Education Blueprint (2015-2025), outlines meaningful strategies to transform the national education system, empower institutions of higher learning with greater autonomy and accountability, develop technologically savvy, well-rounded graduates, and improve the quality of the national TVET sector.

Bank Negara noted that for youth in particular, research has shown that more access to effective vocational training was linked to lower rates of youth unemployment.

Secondly, it said, promoting industry collaboration in education and training was crucial for community-building and to nurture a vibrant workforce.

“A well-funded and effective platform is needed towards offering high-quality training and promoting workforce development.

“Such a platform would serve as an avenue in which the government, industry, and education and training sectors could consult and develop curriculum and training to fulfil industry skill needs, and actively support implementation and continuous enhancement efforts,” it added.

Youth unemployment in Malaysia has been on the rise recently as hiring growth declined since late 2014.

Cautious business sentiments and moderating economic performance have restrained businesses from expanding their workforce.

Youth unemployment rate was estimated to have reached 10.7% in 2015, more than three times higher than the national unemployment rate of 3.1%.

Malaysia is among regional economies with an incidence of youth unemployment in the double-digits, despite a low overall unemployment rate.

Malaysia Bank Negara Highlights 2016

Domestic financial stability was sustained amid bouts of heightened financial market volatility

Key potential sources of risks to domestic financial stability stemmed from high levels of domestic debt, elevated property prices in some segments of residential property, an oversupply of commercial property, and heightened volatility in financial markets.

Growth in household debt moderated further as households scaled back borrowings in line with loan affordability.

• Total household debt as a proportion of gross domestic product (GDP) was lower at 88.4% (from 89.1% in 2015), as the pace of moderation in debt slowed below nominal GDP growth for the first time since 2010.

• The debt burden of households was eased by slower growth in average house prices which increased by 5.3%, compared to an average of 9.5% during 2010-2015.

• The debt servicing capacity of businesses continues to be well-supported with a median interest coverage ratio (ICR) of 9.4 times, comfortably above prudent standards.

• Banking system liquidity comprising placements, reverse repos and statutory reserves with Bank Negara remains ample at RM167.4bil, which can be released to meet liquidity needs.

• In 2017, conditions are expected to remain challenging for some businesses and households.

• There is likely to be some deterioration in loan performance, but this is not expected to be broad-based given the strong asset quality of banks, stable labour market conditions and continued economic growth.

Banking Sector

• Outstanding financing by the banking system expanded by 5.3% to RM1,521.5bil in 2016, mainly driven by financing to the household sector.

• Banks continue to lend to SMEs, which grew by 9.2%.

• Financing by development financial institutions to targeted growth sectors, including the agriculture sector, expanded by 5.7%.

• Transactions conducted through the agent banking network increased to over 100 million transactions valued at RM8.5bil, performed at more than 7,900 agent banks across the country.

• The profitability of banks improved in 2016, supported by gains from treasury activities and strong financing growth from Islamic banking operations.

Insurance and Takaful Sector

• The insurance and takaful sector continued to show positive growth in 2016 supported by strong overall capitalisation.

• Overall insurance penetration, however, has remained flat within the range of 54% to 56% over the last five years.

• In the general insurance and takaful sector, growth was supported by the fire business which offset the impact from slower growth in the motor and marine, aviation and transit business segments

• The industry moved into the first phase of liberalisation of the motor and fire tariffs from 1 July 2016, where new motor and fire products may be offered at market-based prices while existing motor products under the tariff will continue to be available to the public at prevailing tariff rates.

• In the second phase which will commence on July 1, 2017, tariffs will be removed for all existing motor products except compulsory motor third party products where tariff rates will be gradually adjusted

• By the end of 2017, more than three quarters of insurance and takaful policies for personal lines of business are expected to be simplified using plain language.

Islamic Finance Development

• Islamic banking and takaful institutions remain resilient, maintaining healthy financial buffers.

• Investment intermediation activities saw encouraging growth: Investment accounts (IA) managed by Islamic banks increased to RM73.7bil to account for 12.2% of total Islamic deposits and IA within the Islamic banking system in 2016 (compared to RM47.1bil and 8.6% in 2015).

• Over the next two years, the development of the Islamic finance industry will continue to focus on enabling greater business diversification, driven by technology, to sustain its growth trajectory and deliver better customer value.

• An example of this has been the operationalisation of the Investment Account Platform which has facilitated RM20mil of fund-raising exercises since April 2016 to support a variety of business ventures across different industries.

• Another important development priority is in the area of trade finance facilitation where the Bank aspires for syariah-compliant trade financing to support 10% of total trade in the next three years.

 

Cross-Sector Developments

• Malaysia’s debt securities market remains a key source of financing for corporates, rising to account for 37.4% of total corporate financing as at end-2016.

• New issuances of corporate bonds during the year were led by firms in the finance, insurance and real estate; infrastructure; and electricity, gas and water supply sectors.

• In the FX market, the implementation of measures by the FMC in December led to improved onshore liquidity and curtailed the disruptive influence on ringgit volatility from speculative transactions in the ringgit NDF market.

• Local currency settlements in ringgit and renminbi have continued to increase in volume, reducing costs for businesses and contributing to the development of deeper regional financial markets

• Bank Negara set up the Financial Technology Enabler Group to provide a safe and supportive regulatory environment for financial technology (FinTech) innovations - it is tasked to formulate policy measures and strategies for the adoption of technological innovations in the financial services industry.

Payment and Settlement Systems

• Amid the growing threat of cyberattacks globally, effective management of cyber risks was a key focus of Bank Negara’s oversight activities.

• Progress continues to be made towards achieving the electronic payment (e-payment) targets set out in the Financial Sector Blueprint 2011–2020, driven by increased adoption of credit transfers and payment card transactions.

• A key strategic priority for Bank Negara in 2017 will be to facilitate open and fair access to shared payment infrastructures by banks and non-bank payment service providers with the view to create a more competitive payment landscape that fosters continuous improvements in payment services.

Malaysia Bank Negara 2016 Report

The annual report provides an analysis of the developments in the Malaysian economy and outlines the challenges ahead. 

Economy 

• The Malaysian economy registered a commendable growth of 4.2% in 2016.

• The country’s economy is projected to register 4.3% - 4.8% growth in 2017.

• Domestic demand continues to be the principal driver of growth. 

• Private consumption growth is expected to expand 6% in 2017.

• The current account is expected to register a surplus of 1.0% - 2.0% of gross national income (GNI) in 2017.

• Headline inflation is projected to average higher in the range of 3.0% - 4.0% in 2017.

• The international reserves of Bank Negara amounted to US$94.5bil (equivalent to RM423.9bil) as at end-2016.

• Current account position stood at RM25.2bil or 2.1% of GNI, a smaller amount compared to the previous year (2015: RM34.7bil, 3.1% of GNI).

Monetary and fiscal policy

• Monetary policy in 2017 will continue to ensure that its stance is consistent with sustaining a steady growth path amid price stability.

• Fiscal policy in 2017 will focus on further strengthening of the Government’s fiscal position, while ensuring continued support for domestic growth and promoting economic inclusiveness.

• The Federal Government’s fiscal deficit is expected to narrow further, underpinned by sustained growth in revenue and a modest expansion in operating expenditure.

• In the 2017 Budget, fiscal resources have been strategically prioritised towards high impact infrastructure projects and programmes for capacity building.

• For the year as a whole, the ringgit depreciated by 4.3% to end the year at RM4.486 against the US dollar.

• The Financial Markets Committee (FMC), in collaboration with Bank Negara, introduced several measures to deepen and broaden the domestic foreign exchange market, including by promoting foreign exchange hedging within the domestic foreign exchange market.

• Another measure was to require the conversion of foreign currency export proceeds into ringgit.

External debt

• The external debt stood at RM908.7bil, equivalent to US$200.6bil or 73.9% of GDP as at end-2016 (2015: RM833.8bil).

• Malaysia’s external debt position increased by 6.2%, mainly on account of higher intercompany and interbank borrowings.

• Malaysia’s external debt remains manageable given its currency, maturity and balance sheet profiles. About 34.4% of the external debt is denominated in ringgit, mainly in the form of non-resident holdings of domestic debt securities and deposits.

• Offshore borrowing declined to 42.7% of GDP as at end-2016 compared to 60% of GDP during the Asian Financial Crisis.

• As at end-2016, Malaysia recorded a current account surplus and remains a net creditor nation, with international reserves accounting for only a quarter of total external assets.

Bank Negara assets

• Bank Negara’s total assets amounted to RM451bil, with a net profit of RM6.5bil for the financial year ended Dec 31,2016 

• Bank Negara declared a dividend of RM2.5bil to the Government for the year 2016

Affordable housing issues

• Since 2012, the increase in house prices in Malaysia has outstripped the rise in income levels. Consequently, prevailing median house prices are beyond the reach of most Malaysians. 

• The undersupply of housing is particularly acute in the affordable housing segment. This is likely to worsen going forward given current trends in income and demographic factors.

• Growth in loans outstanding for home purchase averaged at 13.2% during 2012-2014 (2008-2009: 9.8%). This moderated to 9.2% in 2016 due to the softer housing market.

• As at end-2016, about 56% of loans outstanding were for houses priced below RM250,000, while loans for houses priced between RM250,000 to RM500,000 accounted for another 25%.

• Rejection rates for housing loan applications fell further to 23.6% in 2016 (2012 - 2015: 26.1%).

• Loans for real estate activities and residential property construction increased at a healthy rate of 11.7% in 2016.

• Meeting the demand of affordable housing units going forward requires the commitment of both the Government and the private sector.

• On the demand side, the development of the rental market to bridge the affordability gap could relieve some of the pressure on the Government to build all of the affordable housing.

Malaysia Tighter Lending Policies

Tighter lending policies have played a key role in mitigating risks to household debts, according to Bank Negara’s Financial Stability and Payment Systems Report 2016.

To continue reducing risks, the central bank said continued vigilance in lending practices must be maintained as well as support for households to effectively manage debt through sustained education and debt assistance programmes.

“Measures such as improvements to public transportation that will reduce the need for borrowings to purchase vehicles and increase income earning opportunities will be important to complement continued vigilance in ensuring responsible financing practices by lending institutions.”

It said further studies on the relationship between debt service ratio (DSR) and default probabilities may provide guidance on indicative levels of prudent threshold of DSR level for different income groups.

“This could contribute towards financial institutions’ credit underwriting, risk management and loan loss provisioning practices.”

The central bank added that this could also contribute towards greater differentiation of borrowers’ credit risk profile based on the DSR level across age and income groups, geographical location and type of financing facility.

“For the bank, through the application of proportionality of regulations, this can reduce potential unintended consequences (such as reduced access to financing for eligible borrowers) of broad macroprudential policies.

“In addition, further studies can better inform the design and calibration of stress test scenarios and parameters to assess the shock absorption capacity across borrowers and lenders.”

According to the report, the largest share of debt (about 40%) is owed by individuals in the top 20 income group (individuals earning more than RM8,000 per month) as at end-2015.

“The average debt level for borrowers in this group is more than twice that observed for other borrower groups. The debt servicing capacity of this group is reasonably healthy as indicated by more prudent debt service ratios.

“Relative to other income segments, a large share of this debt is secured, with about 77% of debt taken out for the purchase of properties and principal-guaranteed investments which contribute towards individuals’ wealth accumulation.”

Bank Negara said borrowers in the more vulnerable income segments, represented by individuals in the bottom 40 income group, accounted for only 11.4% of total debt.

“Borrowers in this group are more likely to face difficulty servicing their debt in the event of a payment shock, given thinner buffers.

“This is somewhat mitigated by the lower proportion of debt financed under floating or variable rate schemes compared to other income groups.

The reports said more than half (53%) of borrowings by this group, however, remained sensitive to changes in interest rates, which could have a disproportionate impact on debt repayment capacity given the low absolute income levels.

Malaysia Employment Insurance Scheme

The Employment Insurance System (EIS), which is designed to help workers and employers cope with a demanding labour market, will start next year.

Prime Minister Datuk Seri Najib Tun Razak announced yesterday that the scheme will benefit around 6.5 million local employees in the private sector.

“EIS is aimed at employees who have lost their jobs. It will be a social safety net meant to provide financial help and assistance for workers in their job search,” he said in a statement.

He said that employees will get temporary financial help and will be assisted in looking for a new job through a job-seeking programme.

The employees, he added, will also be given retraining or additional training to upgrade their skills.

He said that the new policy will be tabled in the June meeting of the Parliament.

The policy is expected to be implemented on Jan 1, 2018 while payment of the benefits will start on Jan 1, 2019, he said.

He added that the scheme will be funded through premiums paid by both employees and employers.

The Social Security Organisation (Socso) will be managing the scheme, he added.

He said that the implementation of the scheme is expected to bring long-term benefits to both employees and employers in the country.

“EIS will add to the efficiency of the labour market (in the country) through a better system of matching supply and demand, and lead to increased productivity and competitiveness of the industries,” he said.

He added that similar schemes in other countries have shown that it can act to stabilise the economy and help sustain economic activities in a country, especially during times of economic crisis.

Earlier in the day at an event organised by Cuepacs in Kuala Lumpur, Najib said the Government needs new sources of revenue to offset the rising cost of public healthcare.

The Prime Minister pointed out that the Government spends RM22bil each year to fund public healthcare services, which only generate between RM400mil and RM500mil in revenue annually.

The Prime Minister said that part of the revenue collected from GST has proven very useful to help offset the rising cost of providing public healthcare.

“If people ask, when the Government imposes GST, where is the revenue spent, the answer is that part of it is used to provide healthcare services for Malaysians,” he said.

Najib praised Cuepacs for introducing the CuepacsCare4U takaful programme, which he said has managed to reduce the financial strain the Government faces in funding public healthcare.

Introduced in 1999, CuepacsCare is a privately-run health takaful (Islamic insurance) scheme that allows policyholders, comprising public servants and their family members, to obtain treatment at private specialist hospitals.

To date, more than 130,000 civil servants have signed up for CuepacsCare. The scheme has paid out RM210mil in benefits to its policyholders.

The Prime Minister announced an RM5mil allocation for CuepacsCare that will go to reducing the quantum of any future increase in the policyholders’ monthly premiums.