OREANDA-NEWS. Malaysia's insurance and takaful sector will remain stable in 2016, underpinned by the industry's solid capitalisation, Fitch Ratings says in a new report. The sound capitalisation will also support the sector's premium growth and potential underwriting volatility as economic growth decelerates.

The sector's solid capitalisation is built on the robust regulatory framework and capital practices required by the Malaysian regulator. The series of regulatory reforms implemented in recent years aimed to raise the sector's competitiveness ahead of full liberalisation and economic integration with other south-east Asian economies. The industry's consolidated risk-based capital ratio was strong at 239% in 1H15, well beyond the regulatory minimum of 130%.

Fitch believes stable domestic demand and low insurance penetration will continue to support the general insurance and takaful sector. This is despite the slower premium growth in 1H15 associated with lower automobile sales and private consumption, as consumers adjust to the Goods and Services Tax implemented in April 2015. The growth in investment-linked policies is likely to stay strong given the low interest rates, but we expect life insurers to increasingly tap on health-related and retirement products as the population ages and medical costs rise.

High claims from the compulsory motor class will continue to pressure general insurers' profitability but this will be partly offset by healthy underwriting margins from fire and non-motor classes. We believe the deregulation of tariff rates in 2016 to have a mixed impact: motor insurers are likely to benefit from greater flexibility in pricing their risks adequately, but it could trigger competitive pricing among fire insurers and erode bottom-line profitability.

Fitch expects M&A activity in the sector to pick up following a quiet 2015. This will be driven by the regulatory requirement for composites to split their life and non-life operations within five years from 2013. There are currently eight takaful and four insurance composites that have yet to split their operations.