The low interest rate environment in recent years has increased the capital buffers that insurers and takaful operators (ITOs) in Malaysia are required to hold against market risk exposures, says Bank Negara Malaysia (BNM) in its financial stability report for 2H2019 released last week.
While this could pose some challenges, particularly for the performance of life insurance and family takaful funds if interest rates fall further, it is not expected to have a material impact on insurers’ profitability or solvency, the central bank adds.
On aggregate, the insurance and takaful sector recorded higher profits in the second half of 2019 compared to the same period in 2018. This was mainly attributed to better performance in the life insurance and family takaful sector arising from gains on investments in debt instruments as interest rates declined. Overall returns on investments correspondingly trended higher (2H 2019: 2.6%; 2H 2018: 1.9%), offsetting the weaker performance of insurers’ equity investments.
The report adds that the insurance and takaful sector maintained strong capital buffers throughout the second half of 2019, well above the prescribed regulatory level of 130%, Capital buffers held against insurance and takaful risk, the largest component of total capital required, have remained largely stable in line with the relatively benign claims environment.
2020
The financial stability report says that the COVID-19 pandemic and the consequent impact on economic activity and financial markets will adversely affect premium and contribution growth in 2020.
In response to the pandemic, BNM has also supported a number of measures by ITOs to preserve continuous coverage for policyholders and takaful participants who are experiencing financial constraints as a result of the pandemic. These include additional flexibility for policyholders and takaful participants to reinstate or make alterations to their policies in order to preserve coverage, the waiver of certain fees and charges, and the option of deferring payments of premiums and contributions without affecting their coverage.
Based on internal assessments, the impact of the slower premium and contribution growth and relief measures can be absorbed by the ITOs without affecting claims paying ability.
BNM has also taken steps to reflect planned enhancements to the capital framework for ITOs which aim to improve the risk capture and overall consistency of the framework. These enhancements are expected to cushion any impact of the relief measures on solvency, and reduce risks of pro-cyclical behaviour by ITOs in response to significant volatility experienced in the financial markets. The measures taken are expected to enable ITOs to continue supporting households and businesses in managing their risks through these exceptional circumstances.