The insurance sector is forecast to see substantial growth in the next few years as continued diversification, consolidation and international activity spur rising premiums and uptake of new services. Moderate GDP growth for the rest of the year, however, could pose a challenge to growth as the effects of a weakening global economy trickle down to private consumers.

Gross direct premiums are expected to reach RM14.3bn ($4.48bn) in 2012 and rise to RM17.5bn ($5.49bn) in 2015, according to the Malaysia Rating Corporation (MARC), a full-service ratings agency, which released its forecasts in a research note in June. This represents a compound annual growth rate (CAGR) of 7%, which is likely to outstrip broader economic growth.

MARC expects new business premiums in the life insurance segment to reach RM10.2bn ($3.19bn) this year, rising to RM13bn ($4.08bn) by 2015. The non-life (general) segment is also forecast to grow from RM4.1bn ($1.29bn) in 2012 to RM4.5bn ($1.41bn) in five years’ time.

The agency said that the life insurance market would benefit from rising incomes, as well as increased deployment of “new and innovative products”. General insurance would see growth stimulated by the implementation of mega-projects, leading to greater demand in a number of segments, including workers’ compensation, employer liability, contractor risk and engineering. The medical and personal accident segments will also continue to perform well, MARC said.

Other observers are even more upbeat about the sector’s outlook. In May, the local press reported that the Life Insurance Association of Malaysia (LIAM) said the life sector could grow by 10% in 2012. Growth would be driven by “the large and growing middle-income population in the region with higher levels of disposable income and who are also financially literate,” Donald Joshua Jaganathan, the assistant governor of Bank Negara Malaysia, the central bank, has said.

The market’s recent growth and promising outlook have led several major international players enter the market. In 2009, the government lifted the ceiling on foreign ownership of insurers to 70% from 49%, allowing greater participation from international firms, which have brought an increased level of dynamism to the industry.

Competition is expected to rise further following the pending auction of the insurance joint venture between the UK’s Aviva and Malaysia’s CIMB Bank. Aviva is selling its 49% share in the local firm as it withdraws from non-core markets, partly to raise cash to offset its exposure to the eurozone crisis. CIMB may also sell a substantial portion of its 51% stake in the venture.

Competition, greater international participation and a new risk-based capital (RBC) framework are also driving consolidation in the industry, as players look to pool resources and capitalise on economies of scale and strategic fits. The RBC regulations require firms to have a minimum 130% of supervisory capital-adequacy ratio (CAR).

According to Matt Harris, the CEO of Chartis Malaysia, the local branch of the international insurer, “RBC implementation helped accelerate the pace of consolidation, with seven mergers and acquisitions taking place in 2011. Many of the local conglomerates took RBC as an opportunity to consolidate. It is widely known that other existing players in the market would entertain potential suitors if approached, so more consolidation is expected.”

Harris told OBG that he expects the sharia-compliant Islamic insurance segment – known as takaful – to continue to grow strongly. In June, the local press reported that Etiqua Insurance & Takaful, the insurance branch of Maybank, the country’s largest bank, has forecast that the family takaful market, which accounted for 80% of the Malaysian takaful segment in 2010, could grow to RM7.2bn ($2.26bn) in two to three years from the current RM4.2bn ($1.32bn).

CAR regulations for the takaful segment similar to those rolled out for conventional insurance are being introduced and are expected to be in effect by the beginning of 2013. While the Malaysian Takaful Association is confident that existing industry players will be able to meet the new requirements, Tunku Dato’ Ya’acob Bin Tunku Tan Sri Abdullah, the CEO of MAA Group (MAAG), which has interests in the takaful sector, told OBG that he expected the new legislation to catalyse mergers and acquisitions in the segment.

According to Abdullah, conventional insurance firms owned by banks have survived better since the CAR regulations were tightened, as the high profits of the banking divisions have funded the increased capital requirements of the insurance business. The insurance divisions, which tend to make a smaller contribution to profits, are not able to meet the significant increase in CAR themselves.

With the insurance market in the process of dynamic change, due to rising demand and regulatory changes that aim both to increase solidity and allow greater international participation, consolidation, diversification and the rise of the takaful segment look set to transform the sector over the coming years.