Revitalising Affected Sectors

National Economic Recovery Plan
Chapter 7


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
  1. 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.

  2. 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.

  3. Despite the setbacks, the insurance and reinsurance industry is still solvent. However, if the economy dips further, problems will escalate.
  • Outflows of Insurance Premium
  1. 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.

  2. 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.
  • De-regulation
  1. With the pressures on the liberalisation of financial services, there is a need for a deregulation plan to promote a more flexible insurance industry.

  2. However, there are still many areas in the insurance industry which need re-regulation to ensure stability and healthy development.
  • Life Insurance

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.

  • Foreign Ownership

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.

  • Recommendations

In order to address the above issues, the following measures are recommended:

  • Monitoring

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
  1. 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.

  2. Encourage banks in Malaysia to tie trade financing packages with usage of domestic insurance.

  3. 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.

  4. Encourage more foreign reinsurers to operate through joint ventures with local insurers.

  5. 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
  1. Bank Negara to initiate speedy implementation of tiering and mergers of insurance companies into stronger business entity.

  2. Bank Negara to formulate guidelines for the mergers.

  3. Bank Negara to allow a longer time-frame for well-managed and medium sized companies to increase capitalisation.
  • Life Insurance
  1. 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.

  2. 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.

  3. The insurance sector should be allowed to manage pension funds or introduce products that allow further pension savings through insurance funds.

  4. Increase the number of trained Bumiputera insurance agents to increase the sale of life insurance policies to the Bumiputera community.
  • Takaful

Promote Takaful as a source of savings not only among Muslims but also non-Muslims.

  • Manpower
  1. 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.

  2. Ministry of Education to introduce insurance education, especially at the intermediate and tertiary levels.

  3. The industry's associations should complement governmentís effort by organising more career talks on the sector in schools and institutions of higher learning.
  • Foreign Ownership

Flexibility should be given to allow foreign insurers to retain 100 per cent equity ownership on a case by case basis.

Chapter 1 | Chapter 2 | Chapter 3 | Chapter 4 | Chapter 5 | Chapter 6 | Chapter 7 | Chapter 8 | Back to Contents Page