By Aidila Razak
The Financial Services Act (FSA) and Islamic Financial Services Act (IFSA), expected to come into force on May 2, could push insurance products up.
This is due to a possible rise of capital adequacy ratios (CAR), following controls over holdings companies.
“We don’t know what the capital requirements will be just yet, but if it means more capital has to be held, then this could mean products could be more expensive,” an industry player who spoke under condition of anonymity said.
He said that foreign-owned insurers will also be less shy to raise prices, in order to “play by the rules”.
According to Sections 108 to 120 of the FSA, companies which own 50 percent or more of an insurance company must register as a financial holdings company.
The company will then be open to oversight by Bank Negara Malaysia (BNM), who will impose prudential standards including group-wide risk management and group capital requirement/solvency standards.
The Act also allows BNM to impose these standards to the holdings company’s subsidiary if deemed necessary to the health of the licensee or a financial group.
Compliance costs
RHB Research in a note last week said that there could also be additional compliance costs imposed on the insurance and takaful companies.
For starters, it said, composite licenses are no longer allowed. Insurance players will need to obtain separate licenses for their general and life businesses under the FSA, while takaful companies will need licences for its general and family operations via the IFSA.
This will mean that each segment of the business will be broken up to have its own managements, boards of directors and operating systems.
“There is potentially an increase in operating expenses to be incurred in setting up new subsidiaries and hiring separate boards of directors, CEOs and other key management positions to operate the new entities. There may also be increasing demand for actuarial expertise,” it said.
Takaful players will also need to consider the cost of separate syariah boards, it said.
Staggered over five years
However, it said that the costs can be staggered over the five-year transitional period for compliance.
An analyst looking into the insurance industry also believes that a price hike is unlikely.
“It would be difficult for insurers to raise their prices unless all their competitors do the same. It would not translate to higher prices,” he told KiniBiz.
But smaller players who may not be able to absorb the cost may be forced to consolidate.
He said that the disaggregation of the industry according to segments could spur long-term industry growth.
“A company may forgo one aspect of the business to someone else, but this will provide better focus,” he said.
He added that introducing oversight into holdings companies could also allow BNM to step in when there are “red flags” like high leverage ratios which is evident in several of Malaysia’s insurance and takaful providers.
“In the future the holding company cannot just inject capital to a licenced subsidiary if there are no reasonable returns. This reduces systemic risks,” he said.
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