LIAM: ‘BNM’s risk-based capital regime has benefitted industry’

By Habhajan Singh
The central bank's recommendation back in 2001 to establish prudential risk management standards has contributed to a significant strengthening of the life insurance sector, says the nation's life insurance body.
"Insurance companies are now very adequately capitalised based on the risks undertaken by the companies.
"Risk management practices have also been significantly enhanced as a result of a risk-based capital regime," Life Insurance Association of Malaysia (LIAM) president Ng Lian Lu told The Malaysian Reserve in a recent interview.
He was commenting on the position of the industry today since Bank Negara Malaysia (BNM) introduced the Financial Sector Masterplan in 2001, which also involved the insurance sector.
Below are extracts from the interview covering a number of issues facing the industry:

Industry Developments

TMR: What is the latest take on the critical illness scheme with EPF?Ng: We are currently in discussions with various stakeholders on the roll out of the scheme. As the scheme is made available to all EPF members who have been a member for at least three months, the potential number of people signing up for the scheme is very significant. Various bodies have requested information and explanation of the scheme's features, hence we see the need to engage the key stakeholders before the scheme is launched. This is despite the fact that the scheme is not compulsory and members have complete freedom in deciding whether to purchase the product and whether the scheme benefits meet their needs.

TMR: What is the progress of members adopting the Risk-Based Capital (RBC) framework?
Ng: The RBC came into force on Jan 1, 2009. All member companies have adopted the RBC. There was never a doubt that the transition to the new regime would be smooth as companies have conducted parallel runs for two years and all teething problems have been addressed prior to the implementation of the RBC.

TMR: A CEO of an insurance company has suggested that the RBC regime provides an opportunity for consolidation, as the regulatory demands greater levels of judiciousness by insurance companies to manage their capital adequacy levels based on the risks they took. Do you share this view?
Ng: Based on the statistics of BNM as at end-2007, there were eight life insurers, 25 general insurers and eight composite insurers. It is not hard to see that there is high potential for consolidation to happen in the general insurance industry. Under the RBC regime, capital required is linked to risks undertaken, (and) insurance companies need to have a proper capital management plan to ensure the efficient deployment of capital. This creates the opportunity for risk diversification through mergers and acquisitions. Companies that manage capital well may also be able to create value by taking over companies that have not managed capital efficiently. TMR: Are we set to see any major M&As in the life insurance sector? Ng: We do not rule out M&As in the life insurance sector in Malaysia. Personally, I would have thought that more M&A activities are likely to happen in the general insurance industry than the life sector.

(to be continued)

(This story appeared in The Malaysian Reserve on Mar 18, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on insurance & takaful called UNDERWRITER, appearing on alternate Wednesdays, edited by Habhajan Singh.)