source: [i3investor]
Insurance - New Proposals To Promote Market Penetration
Author: kiasutrader | Publish date: Tue, 19 Nov 13:41
We are of the view that Bank Negara’s 7 Nov concept paper on life insurance and family takaful (LI&FT) may be the sector’s re-rating catalyst. The proposals focus on ensuring sustainable operating costs, enhancing disclosure and improving policyholders’ value proposition, which should collectively boost penetration, especially in the mass market. We upgrade our sector call to OVERWEIGHT from Neutral.
- Concept paper to boost penetration. We see this as a potential sector catalyst and in line with the Government’s efforts to achieve a high national LI&FT penetration rate of 75% by 2020 (from 54% in 2012).
- The key measures are: i) the introduction of the minimum allocation rate (MAR) to replace commission/operating cost limits (OL) on investmentlinked (IL) products, ii) partially-liberalising OL for pure protection products, iii) boosting direct channels (walk-ins, online), iv) promoting distribution channels (ie agents, bancassurance and financial advisers), and v) encouraging greater product transparency with enhanced disclosure requirements and web aggregators.
- Addressing under-penetration of mass market. Pure protection policies are to have commission-free offerings via direct channels. These are estimated to be 20-30% cheaper than similar products sold through intermediaries. We see this as a win-win for customers and insurers as it will boost insurance penetration in the mass market, while allowing savvy, educated customers to purchase pure protection products directly or via an intermediary.
- Adjustments in store for common distribution channels. The central bank emphasised sustainability of agency cost and agency force (fixed agents to make up 50% of all agents). In the interim, agencies may face adjustments as commissions for initial policy years are expected to decline. W e expect agencies to retain their role in servicing middle-to high-income customers. Meanwhile, the increase in the limit on commissions for savings products in bancassurance may boost its penetration target to 10% of the banking population from 5%.
- Upgrade to OVERWEIGHT, following: i) the recent upgrade on LPI Capital (LPI MK, BUY, FV: MYR18.70) for general insurance, and ii) our positive view on Bank Negara (BNM) measures on LI&FT. The nonagents’ market share of regular premiums is expected to go up to 30% from 14%. While Allianz (ALLZ MK, NEUTRAL, FV: MYR10.70) is a potential beneficiary, we remain NEUTRAL on the stock as we are cautious over its 86% LI&FT agency concentration. FT players like Syarikat Takaful (STMB MK, BUY, FV: MYR11.30) (one of our top picks), may leverage on opportunities in the mass market and bancatakaful (which forms 53% of the Islamic sector’s distribution channels), although wakalah income may fall with the relaxation on OL.
Dissecting BNM’s Concept Paper
A two-phase approach. The key measures will be implemented in two phases, which should provide sufficient time to help smoothen the LI&FT industry’s transition to meet the new requirements.
A two-phase approach. The key measures will be implemented in two phases, which should provide sufficient time to help smoothen the LI&FT industry’s transition to meet the new requirements.
Changes in relation to IL products. The introduction of the minimum allocation rate (MAR) to replace operating cost limits (OL) on IL products. MAR refers to the minimum portion of premiums paid by policyholders that is to be invested in the unit fund, before the deduction of charges. This will benefit customers as it ensures that a portion of the policy’s unit value is retained. In our opinion, the largest change will be on commission limits for annual premiums, which may be reduced by 10-30%, especially for policy years 1-3. For single premiums, the MAR is consistent with the current limits stipulated in the operating cost control (OCC) guidelines. We are, however, unable to ascertain the impact on the agency business and/or the leading agencies at this juncture.
Changes relating to non-IL products. For pure protection products (ie term life, medical and critical illness policies), LI&FT players will be free to charge commissions at their discretion, as long as these are consistent with policy benefits. However, they have to make available similar products that are commission-free via direct channels.
Changes relating to bancassurance products. The limit on commissions for bancassurance products is expected to increase and be in line with products offered by corporate agents. As the commission limit for pure protection products has already been liberalised, this would apply to savings products.
Other changes. BNM aims to provide more incentives to financial advisers, who are intermediaries selling an entire range of insurance and takaful products offered by any insurer and takaful operators. The paid-up capital (ie startup costs) for financial advisors will be reduced to MYR50k (from MYR100k).
Agency financing limits will be removed in order to facilitate sustainable agency development. However, such financing facilities are under the unchanged regulatory requirements, which stipulate that financing has to be sourced from shareholders’ funds.
Market conduct is expected to be more transparent. BNM has recommended higher product disclosure requirements, especially pertaining to the allocation on commissions and costs paid per premium, for the benefit of customers’ knowledge.
Source: RHB
