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Insurance and Reinsurance
Over the past 10 years (1988-97), the insurance and reinsurance
industry had enjoyed rapid growth, mainly supported by the buoyant economy which
grew at an average rate of 8 per cent per annum. However, assets of insurance funds
constitute only 3.4% of the assets of the financial system, indicating the insurance
industry is still far from achieving its full potential.
The issues of the insurance and reinsurance sector are of two
types, firstly those that arise because of the economic slowdown, and secondly those
that are structural in nature. The issues are:
- Impact of the
Economic Slowdown
- Due to the economic slowdown, the number of companies that
fail to meet the minimum solvency requirement has increased. At the end of 1997,
2 general and 1 composite insurers failed to meet the minimum solvency requirement
and at the beginning of 1998, the number has increased to 11 and 2, respectively.
- The stock market downturn has undermined the balance sheet
position of many insurance companies. The industry as a whole has to write down a
total depreciation of investments of RM1.88 billion and profitability of companies
has also declined.
- Despite the setbacks, the insurance and reinsurance industry
is still solvent. However, if the economy dips further, problems will escalate.
- Outflows of
Insurance Premium
- Various efforts to reverse the unfavourable practice of ëexports
on f.o.b. and imports on c.i.fí have not been very successful due to structural deficiencies
in the insurance market.
- Outflows from the non-merchandise is due to undercapitalisation
of domestic insurers which still have limited capacity and lack of expertise to assume
more and larger risks and thus are still dependent on foreign reinsurers.
- With the pressures on the liberalisation of financial services,
there is a need for a deregulation plan to promote a more flexible insurance industry.
- However, there are still many areas in the insurance industry
which need re-regulation to ensure stability and healthy development.
While the advanced countries have utilized the life insurance
as a major provider of long term funds, Malaysia has yet to tap its full potential
as a source of stable future investment funds. In terms of life insurance policies
as a ratio of population, it is low at 27.2 per cent compared with many developed
countries.
- Lack of Technical
Expertise
The insurance industry faces shortage of professional and skilled
staff despite incentives given and the requirement imposed on insurers to spend at
least 4.5 per cent of their total gross salary as expenditure on human resource and
skills development since 1988.
All foreign insurers except AIA and AHA have complied with
the local incorporation requirement. With the economic slowdown and to avoid outflow
of funds, the Government might have to consider extending the dateline requiring
foreign insurers to restructure their equity.
In order to address the above issues, the following measures
are recommended:
Bank Negara to institute an early warning and detection system
and introduce other guidelines to ensure the stability and healthy development of
the sector.
- Reduce Outflows
of Insurance Premiums
- In new and non-traditional markets, change the terms of trade
with trading partners to exports on c.i.f. and imports on f.o.b.
- Encourage banks in Malaysia to tie trade financing packages
with usage of domestic insurance.
- The industry's associations should play a more active role
to complement the government's efforts through moral suasion and educate exporters
and importers on the advantages of using local insurers.
- Encourage more foreign reinsurers to operate through joint
ventures with local insurers.
- Examine the appropriate fiscal and non-fiscal measures and
incentives for both merchandise and non-merchandise insurance that would enhance
and encourage the purchase of insurance from local insurers.
- CapitalisationProgressive
Deregulation Plan
- Bank Negara to initiate speedy implementation of tiering and
mergers of insurance companies into stronger business entity.
- Bank Negara to formulate guidelines for the mergers.
- Bank Negara to allow a longer time-frame for well-managed
and medium sized companies to increase capitalisation.
- The Government to seriously consider transforming the life
insurance sector into an important source of future investment funds and thus should
give more incentives to encourage its growth.
- Separate the combined tax allowance for EPF/Insurance premium
into two allowances of RM5,000 each to encourage purchase of life insurance particularly
by the growing upper-middle income group.
- The insurance sector should be allowed to manage pension funds
or introduce products that allow further pension savings through insurance funds.
- Increase the number of trained Bumiputera insurance agents
to increase the sale of life insurance policies to the Bumiputera community.
Promote Takaful as a source of savings not only among Muslims
but also non-Muslims.
- The industry associations should be encouraged to compile
a database of currently available and future staff requirements at each management
level and the Malaysian Institute of Insurance (MII) to take the lead to train the
required personnel to fill the supply and demand gap in the industry.
- Ministry of Education to introduce insurance education, especially
at the intermediate and tertiary levels.
- The industry's associations should complement governmentís
effort by organising more career talks on the sector in schools and institutions
of higher learning.
Flexibility should be given to allow foreign insurers to retain
100 per cent equity ownership on a case by case basis.
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