Allianz sees tough year ahead

PETALING JAYA: Allianz Malaysia Bhd, one of the largest listed insurance players in the country, sees 2015 as a very challenging year for the company and the industry per se as it grapples with the economic uncertainties further compounded by the fall in oil prices.
Its newly appointed country manager and CEO Zakri Mohd Khir (pix) said that the low interest rate environment coupled with the sluggish economic growth will dampen investment returns, a key source of income for insurers.
"It is going to be a very challenging year with the economic ambivalence. The drop in oil price will lead to a lot of challenges domestically," he told SunBiz in an interview recently.
Zakri noted that as large investors, insurers are all impacted by interest rates.
He said life insurers are more impacted than non-life insurers, with savings business being the most affected.
He noted that the savings element in the life insurance "is virtually gone" because of the low interest rates.
"Basically, that bus has gone … the whole savings element is gone," he added.
As a result, he said, all life insurers have decided to move away from products with a pure investment and toward pure protection products.
Currently, about 51% of Allianz Malaysia's life gross written premiums are from savings products, and the balance 40% from protection and health.
"This year, the life insurance business will face challenges for growth," he said.
He pointed out that with the frail economy and rising costs, in addition to the upcoming Goods and Services Tax (GST), consumers may not have deep pockets to spend on insurance.
"The question is how much money is an individual willing to spend to protect himself?," he asked.
"I think people are going to be very cautious (with their spending). And therefore, insurance is going to be way down the agenda," Zakri said.
Interest rates have the largest impact on long-term business where investment income is a major source of earnings for insurers.
In non-life insurance, however, the interest-rate risk can be contained through prudent asset-liability management.
On the life insurance side, savings products are the most exposed to interest-rate risk because investment income is the main source of profit.
Long-term interest rates serve as the valuation basis to determine premiums, policy reserves, guaranteed rates of return and profit-sharing.
All life insurance companies buy investments like bonds, sukuk and mortgages, and then repackage the benefits into their products. Ultimately, these products must reflect the yields of the underlying investments.
As a result, interest rates have a direct and indirect impact on life insurance companies, their new product offerings, and existing policies.
The benchmark interest rate in Malaysia now stands at 3.25%. It averaged 2.94% from 2004 until 2014, reaching an all time high of 3.50% in April of 2006 and a record low of 2% in February of 2009.
The yields on Malaysia Government 10 year bonds increased to 3.85% in February from 3.80% in January of 2015. It averaged 4.05% from 2001 until 2015, reaching an all time high of 5.35% in April of 2004 and a record low of 2.87% in January of 2009.
On another note, Zakri said in 2014 Allianz Malaysia's life insurance business did well whereas the general side grew within expectations.
Allianz Life Insurance Malaysia (ALIM) is the fifth-largest player in the life insurance market with a market share of 7.2% as at September 2014.
Allianz General Insurance Company (Malaysia) Bhd, the general insurance subsidy of the group continues to lead the way as the leading conventional general insurer in the country with a market share of about 12.4%.
Despite a challenging environment ahead, Zakri expects the company's strategies to sustain its above-industry growth.
In the 12 months of 2014, the group recorded a total insurance premium revenue of RM3.25 billion compared to RM2.85 billion in 2013.
Net profit for the year increased by 24.4% to RM295.9 million from RM237.9 million in the previous year.
The group's total assets grew by 13% at RM12.16 billion as compared to RM10.76 billion before.