Insurance companies to tread carefully in low-yield environment
By Xavier Kong |   |  Featured, Income+, Mainstream

FIXED income instruments may have been a favourite of insurers in growing their businesses but industry players believe these days caution is the word of the day, despite such securities providing low yields.

Some, such as Lonpac Insurance Bhd CEO Tan Kok Guan, still believe that a large portion of the insurers’ investments has to come from fixed income.

“The investment markets are very volatile now with many uncertainties. We will continue to maintain a very prudent approach in our investment policy and maintain a big portion of our investments in fixed income securities even though yields have come down,” Tan told FocusM.

He also added that LPI Capital will have to maintain high liquidity to meet insurance liabilities, due to the short-tailed nature of a majority of its insurance contracts.

Allianz Malaysia Bhd CEO Zakri Khir, however, is taking a more diversified approach towards the issue.

“Our investment approach takes into account factors such as insurance liability characteristics, investment return expectation, risk capital requirement and risk tolerance levels,” Zakri said.

Moving forward, he shared that Allianz will be looking towards optimising strategic asset allocation to navigate a persistent low-yield environment.

“We will also implement tactical strategies to capitalise on market fluctuations and mispriced investment opportunities, as well as explore alternative investments for yield pick-up and diversification, while looking to derivative transactions to manage duration and interest rate risks,” he said.

“The changes in interest rates will have an impact on both the asset and liability side of an insurer’s balance sheet.”

How will unemployed Malaysians affect insurance premiums?

At the same time, the sector is also buckling down to face tough near-term quarters, as Malaysians face the highest unemployment spike since 1990. This comes from the Department of Statistics, where the latest figures show a 48.8% leap year-on-year in unemployed people to 778,800 in April 2020, which brings the total unemployment rate in Malaysia to 5% as of April.

This, according to chief statistician Mohd Uzir Mahidin, is due to the closure of operations for most businesses during the movement control order (MCO), which has in turn affected loss of employment, with jobseekers hardly able to find jobs. 

As it stands, the understanding among the industry is that, in tough times, insurance premiums will fall in priority.

“We expect demand for insurance will be affected in the second and third quarters, but expect trends to be back to near normal by the last quarter of 2020, provided we are not hit by the second wave of Covid-19,” shared Tan, noting that the long MCO and the interruption to global supply and demand had badly affected many businesses.

“With the easing of the lockdown, businesses are trying to recover and assess business viability and manage cash flow. We are committed to assist our clients in their recovery efforts,” he added.

On this matter, Zakri noted that there were several relief measures in place to help policyholders, as part of the government’s economic stimulus package.

Life insurance policyholders and family takaful participants have been given the option of deferring regular premium payments without affecting their coverage, according to Zakri. 

He said that the deferment of premium or contribution payment of three months allows policyholders who are financially affected by Covid-19, including those who are unable to earn an income, to have a grace period of three months to pay the premium due.

“The financial impact from this relief measure, available from April 1 to Dec 31, 2020, should be manageable for industry players,” said Zakri.

However, he also expressed concern that the overall impact of the Covid-19 downturn is yet to be seen.

“The impact on the insurance industry in Malaysia will follow the fortunes of the economy, where insurers which have more capital and operate from a lower cost base will survive. As for customers, when the climate changes, so too will the buying habit. That is just how it is and we are prepared for that,” said Zakri.

The Covid-19 pandemic has brought a downturn, and is expected to weigh heavily on the profitability of the sector due to weak consumer sentiments and contracting premium growth, according to Zakri.

“The pandemic took everyone by surprise and there are a lot of questions still unanswered,” he added.

As it stands, at a press conference dated June 30, Zakri shared that Allianz is looking forward to a single-digit topline growth, with profit for the group coming “inline, if not better, than 2019.”

Sun Life Malaysia CEO Raymond Lew believes that the pandemic has pushed businesses to adapt by rethinking their strategies. 

“Industry-wide, players must be more explorative and innovative to devise new offerings that suit the current economic appetite and health requirements of the people who are similarly adjusting to the new normal,” he told FocusM

Lew also believes that long-term investments must be made to further digitise processes and outreach approaches, building on the experience of Covid-19 to safeguard against similar occurrences in future. – July 1, 2020

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