Malaysia: Recent flooding is not likely to affect insurers - Fitch Ratings

New Straits Times 3 Feb 15;

KUALA LUMPUR: The recent heavy flooding in Malaysia is not expected to affect the country's insurers or excessively strain their financial performance, says Fitch Ratings.

“The Malaysian insurance industry maintains a strong level of capitalisation, and existing capital buffers should be sufficient to cushion any losses without having a significant credit impact,”said Thomas Ng, its insurance analyst

The government has estimated that direct flood losses in the five affected states could total up to RM2 billion (US$560million).

However, the economic losses associated with the natural disaster are likely to be much higher than the insured losses.

“This will be due in part to the low insurance penetration rate in Malaysia and the areas affected in particular.”

The non-life insurance penetration rate was around 1.7 per cent in 2013, according to Swiss Re, and is likely to be even lower in the suburban districts which were most significantly damaged.

“Flood damages are not automatically covered in standard comprehensive motor and fire insurance policies in Malaysia, which should also lower the potential insured losses.“

Flood claims are still ongoing, and there is still scope for brokers and adjusters to upwardly adjust loss figures -- considering the significant damage to public infrastructure and economic activity in East Coast states including the key rubber, oil palm and agriculture sectors.

Ng said credit impact is low as history indicates that such claims from seasonal floods are likely to be manageable for the industry.

Furthermore, Fitch expects insurers have purchased reinsurance coverage to protect themselves against adverse catastrophe losses.

“More importantly, Malaysian insurers are protected by a regulatory capital adequacy ratio of about 250 per cent as of end-June 2014, which is almost double the regulatory minimum required of 130 per cent.

“Notably, insurers tend to maintain risk-based capital ratios in excess of internal target capital levels.”

The sector's strong capital levels are an important factor in positioning for relatively robust growth.

He said the prospects for premium growth remain relatively strong, underpinned by low penetration rates, a growing middle class and heightened insurance awareness in areas with faster urbanisation.

“As the sector grows, insurers will need to enhance their risk management practices and modelling to better assess natural disaster risks, as underscored by the recent flooding.“

Growing urbanisation and weather uncertainty related to climate change is likely to raise the risks to insurers from flooding over the medium and long term.

According to the rating agency, detailed mapping of flood-prone zones, and better assessment of the probabilities and impact from meteorological data, will help insurers to price flood risk better, provide flood coverage and mitigate adverse flood losses.