The Foreign Grip On Our Insurance Industry

It is disheartened to note that the Malaysian insurance industry is already moving under the imminent grip of foreigners. On Farah Saad’s own writing over at the antdaily…. MIO would take this opportunity to do a “write-over” of her article (in Chinese, they call it “KA HIM KA CHO”) in the box (below).

Hope you enjoy this write-up while resting during this festive season | MERRY BLESSED CHRISTMAS!

Here is the article by Farah Saad:

KUALA LUMPUR: In just five years, foreign insurance com­panies have taken control of the local insurance industry. Since 2010, 16 foreign insurance companies have spent RM15 bil acquiring stakes in local insurers through mergers and acquisitions (M&A).

The change in control of these Malaysian companies, especially the general insurers, was triggered by Bank Negara Malaysia’s (BNM) move in 2009 to liberalise the local insurance industry by allowing foreigners to buy up to a 70% stake.

Is this foreign grip on the local insurance industry good for Malaysia? To some, foreign insurers bring with them financial resources, technology and expertise which are lacking among local insurers. On the other hand, for­eign control could also lead to a dearth of local talent development, limiting expansion by local companies abroad and loss of decision-making power.

Of course, having invested a lot in the local company it is imminent that the foreign shareholders send their trusted lieutenants to comb the newly acquired company, finding ways to work to take it forward in the manner that they wanted. In the process they may have to sideline the local talents for foreign personnel. In that sense reducing the importance of local decision making…. The frustration part to the local personnel is while knowingly that a particular strategy may likely fail but somehow no opportunity to raise and articulate the points to those foreign lieutenants. Most of the time shutting your mouth means keeping your job….

Should the central bank have instead nurtured local insurance players to merge their operations into bigger and stronger entities like how it did with the banking sector in 1998? Could Malaysia today have had its own formidable insurance company to take on the world if the central bank had taken this route?

If we recap, BNM had in the after­math of the 1998 regional financial crisis, successfully driven local banks to merge into bigger financial insti­tutions to compete globally. This is evident even today as CIMB Group, RHB Group and MBSB are proposing to merge into a much bigger banking group.

 It had been proven merging a few insurance entities to form a more formidable local insurance company somehow never materialised – clear examples are Kurnia and Tahan. So what else can Malaysian say? Maybe our talents are nothing more than just JAGUH KAMPUNG….

Life insurance is already dominated by big foreign names such as Great Eastern Life, AIG, Prudential, AIA, Allianz and several other smaller but prominent names.

The only major Malay­sian players left in the industry are Syarikat Takaful, Tune Insurance and Lonpac Insurance. Lonpac, the largest of these local insurers, is ranked eighth – after AIG – in terms of paid-up capital.

The central bank liberalised the financial sector in 2009 by allowing foreigners to increase stakes in insur­ance companies, investment banks and Islamic banks from the previous cap of 49% to 70%. This opened the floodgates of foreign participation in the insurance sector.

BNM also introduced regulatory changes such as a risk-based capital framework for conventional insurers from 2009 (and for takaful operators in 2014) plus other operating guidelines for general and life insurance. Industry consolidation saw the number of direct-licensed insurers decline from 39 in 2009 to 32 today.

Fortunes have changed in the local insurance industry. In 1955, 95% of the sector was in foreign hands, with 93 players. In the 1970s, the scenario was virtually unchanged, before ownership began slowly to move into the hands of local companies in the 1980s. The decade also saw the establishment of many smaller local insurers. In 1988, the number of insurers had been whittled down to 60, comprising mostly local players who had taken over from foreign ownership or had set up on their own.

However, rapid economic develop­ment and policies implemented by then-prime minister Tun Dr Mahathir Mohamad saw an increasing number of foreign insurers returning to the country. Smaller local insurers, unable to compete, turned to these foreign establishments in exchange for con­trolling equity.

These changes led to the coining of the term “foreignisation” to describe the local industry. What are the implications of an increasing foreign presence in the Malaysian insurance industry?

Decision-making also seems to be a point of concern for industry observ­ers, who say local insurers lose their autonomy when a controlling stake is taken by a foreign party.

“Ultimately, managerial decisions will be done outside the country, with local man­agement and directors reporting to higher-ranking management outside Malaysia. Decision-making power is lost through these acquisitions,” says one observer.

Perhaps this decision making issues may likely be a sore point…. it is usually to do with STRATEGIC matters, where most of them are decided at regional or at the foreign shareholder’s head office – but at times those decision makers may likely be misinformed, i.e., it is normal as a result of language barrier (liken as duck and chicken talk) and sometimes this is due to cultural effects, i.e., foreigner (personnel) based in Malaysia may think as they usually do, expecting the operating environment to be the same or almost similar when making a conclusion, or perhaps some did get impatient while asking questions with the local staff but not getting to the answers, or they think it is best  to re-engineer the whole operations and change the way things were being done thus far….

While M&As are seen by some as a sort of financial rescue, others see them as the quickest way for a foreign entity to establish a presence in a market.

According to a standpoint com­mentary from RAM Rating Services Bhd head of insurance ratings Julie Ng dated July 2014, there is a considerable advantage to being a global player in a relatively small market. Unless smaller insurers find their footing, they will be eaten by bigger fishes.

“Large, established companies with strong balance sheets, good product in­novation, risk-management expertise and extensive distribution channels will enjoy a competitive edge, although smaller insurers may still thrive in niche segments with the right business model and know-how,” she says.

Hard to agree if smaller insurers will be able to thrive in niche segments given the fact that the costs of operating an insurance or Takaful company have been on the uptrend; simply says, guidelines from the regulators insisting on Appointed Actuary, Chief Risk Officer, Chief Compliance Officer and with more personnel to handle stringent risk management requirements and updating the Board and regulators on various regulatory requirements – the overall processes don’t come cheap….so if the insurer is not sizeable (in term of premium base) then it is extremely difficult for them to not only grow efficiently but finds it hard defending their turf.

Some don’t see the increased pres­ence of foreign players as a bad thing. An official with a regulatory body says a large foreign presence is required to meet the demands of consumers who are more discerning and have a wide range of needs. A good balance between foreign and local companies is needed to add depth to the market.

“What local players cannot insure, a foreign-owned insurance player will. This offers consumers a more diverse product base and creates a healthier, more competitive market. We cannot look merely at retaining stakes in the hands of local companies for the sake of doing so – we must look from the perspective of what the consumer needs,” the official commented further.

If there is anything to argue against what this official has commented is he/she may not had known about “risk fronting”, where foreign insurers need not be in the country or ownedsubstantial shares in any of the local insurerin order to provide those diverse product bases as options for our Malaysian insuring public. Working in partnership with local insurers enables the foreign insurers toparticipate in the local market environment, ascan be seen in the case ofCOFACE, a foreign Credit Insurance player in Europe.But whatever being the real reason(s), the locals and the foreign lieutenants must learn how best to work efficiently and effectively towards achieving established common goals – it is pathetic when those foreign lieutenants don’t articulate well the strategic and tactical direction for the company, and through it all, consultants after consultants are being engaged to carry out projects after projects that may at the end of the day doesn’t add up….

What do you think? Pass your judgement below in the comment box….

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