Will the soon-to-be-gazetted Financial Services Act (FSA) and Islamic Financial Services Act (IFSA) spark another round of consolidation among domestic insurers?
Yes, according to RHB Research, which said in a report the new rulings could have a “huge impact” on insurance firms, especially takaful players like Syarikat Takaful Malaysia Bhd and Malaysian National Reinsurance Bhd's Takaful Ikhlas Sdn Bhd.
This is because the FSA will prohibit insurers from operating both life and general insurance simultaneously. Takaful operators are to be subject to the same conditions under the IFSA.
The reverberations would be felt more deeply in the takaful industry due to the higher number of composite licences issued to them than their conventional insurance counterparts, RHB Research said.
Nonetheless, the brokerage noted that the rules would not apply to the four takaful companies out of 12 that had just secured the latest family takaful licences, which are not composite licences, in 2010, comprising AmFamily Takaful, Great Eastern Takaful, AIA-AFG Takaful and ING-Public Takaful Ehsan.
The affected parties will have five years within which to comply with the separation of their units. They may also apply for more time on a case-by-case basis.
“The new laws may prod the affected insurance or takaful players into setting up entities to manage their general insurance and life insurance operations separately in order to retain those businesses.
“If so, the composite licences are likely to be relinquished and replaced with separate licences owned by the potential subsidiaries. This is akin to Allianz Malaysia's company structure, whereby Allianz Life Insurance Malaysia and Allianz General Insurance are separate entities with their own managements, boards of directors and operating systems,” RHB explained.
“Meanwhile, there is potentially an increase in operating expenses to be incurred in setting up new subsidiaries and hiring separate boards, CEOs and other key management positions to operate the new entities.
“There may also be increasing demand for actuarial expertise. However, these costs can be spread over a five-year timeframe,” the brokerage added.
RHB believes that a move to carve up insurers and put them under different managements would result in a “stronger and sharper” focus and may promote industry growth over the longer term, adding that similar legislation had been rolled out in Africa and India.
Besides the requirement for composite players to split their life and general insurance operations, the proposed provisions that would have the largest impact on the industry include the corporatisation of private Islamic financial services companies, the 50% ownership cap on financial holding companies (FHCs), and supervision of FHCs, RHB noted.
“The proposed rules are meant to nurture and promote the industry's long-term growth. In the near term, we see the FSA encouraging further sector consolidation, as insurance players strive to conform to the conditions.
“Moreover, as the industry liberalises, some players may have to adapt sooner than others to prepare themselves for a more competitive landscape,” the research house added.
Another possible consequence of the FSA, RHB said, was the rise in demand for actuaries, given that the separation of an insurer's life and general insurance units would require the setting up of another actuarial department.
“However, we are concerned whether this would give rise to a mismatch between the regulator's actions against the availability of actuaries. As the industry sector is already experiencing an acute shortage of actuaries, this could negatively impact on the industry, moving forward.
“We note that there are slightly more than 100 qualified actuaries in Malaysia, of whom probably less than 10 are qualified bumi actuaries.”