With hardening rates and lack of capacity, reinsurers have been able to command better prices despite their increased exposure. Malaysian Re’s Mr Ahmad Noor Azhari Abdul Manaf tells us about the current market.
Malaysia’s insurance and takaful sectors are poised to see recovery this year, amid volatility in the global financial markets. This is a continuation of the good year the industry had in 2022, following the post-lockdown recovery.
According to the Malaysian Takaful Association (MTA), the takaful industry posted strong growth in 2022 on the back of the country’s post-lockdown recovery phase, with family takaful seeing a penetration rate of 20.1% last year compared to 18.6% in 2021. Meanwhile, general takaful business generated gross direct contributions of MYR4.6bn ($992m) in 2022, a year-on-year increase of 21.1% over 2021.
Statistics from the General Insurance Association of Malaysia (PIAM) also showed a similar trend for the insurance industry. Nonlife insurers recorded an increase in gross direct premiums of 10% to MYR19.4bn for the full year 2022 compared to 2021.
The industry is showing a marked resilience in the face of uncertain global financial conditions. According to Malaysian Re president and CEO Ahmad Noor Azhari Abdul Manaf, globally, reinsurers have experienced prolonged years of elevated natural catastrophe losses with negative impacts to the reinsurers’ bottom line. In response, a number of reinsurers have scaled back their catastrophe exposures and this development has led to the capacity crunch worldwide.
“In addition, the combination of sluggish post-pandemic recovery and Russia’s invasion of Ukraine which have restricted the supply of global energy and food production, have driven inflation. In response, central banks including Bank Negara Malaysia have raised the rates,” he said.
Underwriting performance remains strong despite inflation
Malaysian Re’s underwriting has not seen a notable the impact, especially for the domestic market. This is due to inflation not being as severe as experienced as compared to the major global economies. Headline inflation in Malaysia appears to have peaked at 4.7% in Aug 2022, and has been on downward trend and eased to 3.8% in December 2022 and further dropped to 2.8% in May 2023.
“Inflation has had effects on motor as well as medical and hospitalisation claims. Domestically we have some exposures through the voluntary cessions portfolio although given the relatively small size of the business, we are unable to ascertain the exact claim increase attributed to inflation,” said Mr Ahmad.
“However, Malaysian Re has exposures to overseas liability in European, UK and US markets. As such for claims liability reserves, we have slightly adjusted the claim ratio upward to account for the inflations in those overseas markets. Nevertheless, the impact of the interest rate movement is more visible on the investment side as our capital have been somewhat affected due to the deterioration in value of bonds.”
In addition, whilst higher interest rates have positive impacts on the fixed income markets, the underlying inflation and geopolitical risks have negatively affected the equity market which have translated into challenging investment income for the reinsurer over the 2020-2022 period.
For Malaysian Re’s cedants, there has been a concern on the limited capacity available in the market especially for natural catastrophe coverage and the worry of not getting their reinsurance programme fully placed is immediate in their mind, according to Mr Ahmad. “In addition, they also face the sharp rising reinsurance cost which places pressure on maintaining profitability.”
Global lack of capacity a boon
Globally, the lack of reinsurance capacity has caused the market to harden with reinsurance terms improving and rates rising. This augurs well for reinsurers, who are seeing positive outcomes.
“We see it as a great opportunity because as far as business is concerned, we are able to be more selective with the business that we are writing. With more hardened terms, we could write less business or smaller shares but yet be able to generate the same if not bigger premiums,” he said.
For the Malaysian market, reinsurers continue to impose hardening terms due to the largest catastrophic loss in 2021 (Malaysian floods) and various risk losses. Despite no major CAT and risk losses in 2022/2023, the momentum of improvement in terms and conditions continues and reinsurers have seen treaties changed from surplus to quota share and surplus, to provide balance to reinsurers.
Mr Ahmad also said that for the period of April 2022 to the January 2023 renewals, for non-proportional treaties, the reinsurance cost has increased by high double-digit figures for treaties that were affected by the flood. For other non-fire treaties, the increase was in the region of low double-digits. For proportional treaties, the commission has been reduced as well. Additionally, loss participation clause was imposed into most property treaties where insurers shared a certain percentage of losses that affected the treaties.
“Recent inflation was factored into additional loading on the premium when assessing the pricing for reinsurance cover,” he said. “Our underwriting team believes the prices will remain at current inflated level with sustained momentum to climb further in the next 12 to 18 months. However, the rise may not be as drastic as what we have seen in the last renewal seasons and will start plateauing afterwards.”
Mr Ahmad said that Malaysian Re will continue to take advantage of the current economic conditions to maximise profitability. “We will be capitalising on the increased rates whilst maintaining underwriting discipline as well as adopting prudent investment strategy will be the key for optimising profitability,” he said.
“For underwriting, we will continue to take advantage of the hardening markets to improve the quality of our business in our book. For investment, we may underweight equities and continue to increase our position in fixed income and cash in light of the volatile market environment and expectations of slower global growth. We will take a defensive approach on equities, focusing on high dividend yielding stocks and sectors with specific drivers.”
He added that Nat CAT will continue to see growth for reinsurers due to rising prices in the hardening market and this line of business will also continue to see increased claim activities due to underlying climate change. In addition, he believes that increased digitalisation will also drive-up cyber coverage, though the risks will also be on the upward trend, particularly from the booming AI applications and elevated risk of data breaches and identity theft. A