RAM: Takaful industry faces increased volatilty, credit risks from investments

PETALING JAYA: Malaysia’s takaful industry will not be spared the impact of the anticipated economic slowdown in 2020 amid the Covid-19 pandemic as takaful operators grapple with increased volatility and rising credit risks from their investments along with considerably hampered growth, according to RAM Ratings.

In addition, it noted that a protracted low interest rate environment will strain the capital position of operators if the negative duration gap between assets and liabilities widens.

“However, the economic impact of the health crisis, while severe, is viewed as temporary and gradual recovery is expected by year-end and takaful operators’ robust capitalisation is envisaged to help them navigate the crisis,” said the rating agency in a report.

Last year, the industry reported family takaful new business contributions grew 25% to RM6.2 billion against a 13% growth recorded in 2018, mainly driven by the national health protection scheme, MySalam.

Excluding MySalam, growth came in at an estimated 16%, anchored by credit-related takaful products and the employee benefit group business.

“While family takaful profit more than doubled to RM3.8 bil in 2019 – supported by improved contributions and a better investment performance – we foresee the industry’s profitability in 2020 to be softer in view of a subdued top line and downside pressure on investment income owing to volatile capital market movements in recent months,” said its co-head of Financial Institution Ratings Sophia Lee.

Similarly, the general takaful industry expanded by 20% in 2019, led primarily by the motor business.

However, the rating agency estimated the profitability of the general takaful business to be strained in the tough economic environment as the segment has seen thin net underwriting margins, with 2019 margin stood at 1.5%.

Nonetheless, it believed the industry’s investment income should be able to counter some of the profitability pressures as the segment has limited exposure to the equities market and may record some gains from its fixed income portfolio, considering further OPR cuts anticipated for the rest of 2020.

Despite the headwinds, RAM Ratings stated the strong capitalisation levels of both the family and general takaful industries should be able to buttress the impact of the interim adversity.

Based on latest available data, the industries’ capital adequacy ratios were sturdy at 194% and 293%, respectively as at end-June 2019 – comfortably above the minimum regulatory requirement of 130%.

RAM Ratings has maintained a stable outlook on the Malaysian takaful industry for 2020, but cautioned that downside risks remain considering the high degree of uncertainty over the momentum of the spread of Covid-19 and its ultimate global peak.

source https://www.thesundaily.my/business/ram-takaful-industry-faces-increased-volatilty-credit-risks-from-investments-JC2325946