• All medical and health insurance plans are likely to be on co-payment eventually. Presently, it is not compulsory for existing full medical and health insurance policies to switch to co-payment plans despite insurers offering this option. Policy holders with existing products with no co-payment features are still allowed to renew their policies. However, news has been rife that existing life insurance policies with no co-payments will eventually be compulsorily converted to policies with co-payments if insurers either i) repriced premiums of existing medical and health insurance plans upwards to cover rising medical inflation/costs, or ii) amended features of existing medical and health insurance products. Regulators will deem existing medical and health plans as new when either events occurs. The need for repricing of premiums of existing life insurance policies will be dependent on claim experiences of insurers and takaful operators (ITOs). This change is likely to be adopted sometime in late-2024 or early-2025. Moving ahead, all new products introduced by ITOs are required to have co-payments.
• Co-payment improves the affordability of insurance protection due to medical inflation with lower premiums, particularly towards the B40s and lowers risks to ITOs for disciplined policy holders. Claims on medical insurance are expected to be lower as co-payments are likely to result in policy holders becoming more conscious of the total expenses/costs from medical tests/treatments.
• The net impact of co-payment is expected to be neutral to mildly positive for ITOs with benefits skewed towards insurers that are more up-to-date and active in repricing up their premiums for medical and health insurance policies in tandem with the escalation of medical cost. We see mild positive impacts on two stocks under our coverage, Allianz Malaysia (BUY, FV: RM22.80/share) and Syarikat Takaful Malaysia Keluarga (BUY, FV: RM4.70/share). Investment-linked products constituted 79.4% of Allianz Malaysia's ANP as of end-6MFY24. Allianz has been proactively repricing premiums by cohorts to account for the impact of medical inflation. We envisage co-payments to assist in stabilising the persistency ratio of Allianz Malaysia as medical plans will be become more affordable in the longer run.
• Exposure draft of the new capital adequacy (RBC 2.0) framework has been issued on 28 June 2024. Changes on capital requirements to be based on MFRS 17 will be enforced on 1 Jan 2027 and are likely to lower ITOs' capital adequacy ratios (CARs) ahead. Presently, CARs of ITOs are still based on MFRS 4 despite MFRS 17 being implemented on 1 Jan 2023. The objectives of RBC 2.0 are to have a better alignment with the global standards, consistency and comparability of capital adequacy framework across the insurance and takaful industry. Also, it is intended to be a more effective and overall risk-sensitive solvency framework with multi-phase reviews.
• We expect CARs of ITOs under our coverage to remain above the minimum regulatory requirement post-adoption of RBC 2.0. ITOs are expected to still have buffer in their capital positions above the regulatory requirement as the minimum CAR is likely to lowered from 130% presently to 100%. The new capital framework will be implemented on 1 Jan 2027 with the commencement of parallel run on 1 Jan 2026. As of now, the net impact to CARs of insurers remain uncertain. This is in view that potential changes outlined in the exposure draft are still subjected to changes with the regulator receiving feedback from insurance companies.
• For life ITOs, additional capital charges will need to be recognised for medical payments, contribution and catastrophe risks from 2027 onwards. Recognition of surplus risk funds of life insurance/family takaful will be limited with total capital available (TCA) capped at 100% of total capital required (TCR). On TCR, ITOs are required to ensure that the target risk level underlying capital charges cover 99.5% confidence level over a 1-year period, in line with global standards. These changes are expected to have a negative impact on CARs of insurance companies.
• Meanwhile, general ITOs are required take into consideration additional risk charges on claims for fire and motor, contribution/expense risk besides the new capital charges on catastrophe and non-default spread risk. On operational risk, capital charges will also be higher based on 2.75% of gross premium/contribution over the gross central estimate (CE) contract liabilities.
• Generally, market risk capital charges will be higher ahead.

Source: AmInvest Research - 24 Sep 2024