Published December 2, 2008

KL ready to relax foreign stake cap to stoke mergers

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(KUALA LUMPUR) Bank Negara Malaysia has offered to relax ownership rules for selected foreign financial firms as it seeks to encourage mergers in the local insurance industry, according to a report in Malaysia's Business Times.

These foreign institutions are allowed to hold up to a 75 per cent stake in local insurers from the maximum 49 per cent currently, MBT quoted industry sources as saying. But there's a catch. They will have to buy one or more smaller general insurance companies to qualify for the controlling stake.

The newspaper said it has learnt that at least two companies, Primus Pacific Partners (HK) Ltd and a European-backed composite insurer operating here, have been approached by Bank Negara, the source said. Primus has a 20.2 per cent stake in EON Capital Bhd, where its unit EON Bank is now in talks to buy general insurer PacificMas Bhd.

'Bank Negara is match-making some of these larger firms as the implementation of the risk-based capital adequacy (RBC) framework deadline draws closer,' the source said.

The RBC framework had its trial run early this year and it was revealed that at least seven non-life insurance companies were unable to meet the minimum capital required come Jan 1, 2009. The RBC framework requires each insurer to maintain a capital level that commensurates with its risk.



'These smaller companies are under pressure to merge. Many of them are now looking for suitable suitors to inject capital which they are in dire need of to survive,' he said.

Bank Negara told Malaysia's Business Times that it will relax its rules on a 'case to case basis'.

'Moving forward, the smaller-sized general insurers will benefit from the synergies and economies of scale by strategically aligning with stronger partners to enable them to leverage on technological advances and offer a wider range of insurance products and services,' it said.

Small general insurers will face more competition and a tougher business environment if they stay fragmented, Bank Negara said. The central bank said that it has always encouraged insurers to consolidate as part of its efforts to foster a more resilient and sound insurance sector. 'Since 2000, a total of 16 mergers and acquisitions have been completed.'

According to the General Insurance Association of Malaysia as at April 1 this year, there were 39 general insurance companies operating in Malaysia comprising 23 general insurers, 10 composite insurers and six general reinsurers.