Malaysia’s softer divestment stance to improve M&A outlook

Regulator’s flexibility in dealing with firms will create more robust local market, expert says

Malaysia’s softer divestment stance to improve M&A outlook

Insurance News

By Gabriel Olano

The decision of Bank Negara Malaysia (BNM), the country’s central bank, to be more flexible in enforcing its foreign ownership limits in the insurance sector, is a positive development for insurance mergers and acquisitions (M&A) in the region, an insurance law expert told Insurance Business.

Previously, the central bank imposed a hard deadline of June 30, 2018, for all fully foreign-owned insurers to reduce their holdings to 70%. However, the regulator changed its stance, and announced that the deadline for compliance will be determined by individual agreements between BNM and the insurer.

According to Ian Stewart (pictured), a Singapore-based partner at Clyde & Co and expert in insurance M&A and regulatory matters, while BNM’s goal to lower foreign participation in the market remains unchanged, it has shown that it recognises the practical reality that sellers need to explore a range of divestment options and that the timeline to implement various strategies should be evaluated on a case-by-case basis.

“A number of recent regulatory and policy developments are altering the ASEAN insurance M&A landscape, at least in the short term, and BNM’s announcement is an example of a regulatory intervention that will impact regional M&A strategy,” he said.

“More broadly, regulators in a number of Southeast Asian markets have also taken steps to increase the capital obligations imposed on insurers, and in some of the emerging regional markets, this has been undertaken as part of a package of reforms aimed at consolidation,” he said.

While such regulatory actions will place pressure on insurers in the short term and force them to modify their structures, Stewart believes that this will reap benefits in the longer term, by creating a more robust local market that inspires greater customer confidence.

According to Stewart, despite some apprehension from the likes of AIA to reduce their holdings in the Malaysian market, it is not a sure sign that the market will see less M&A activity.

“Decisions by governments in relation to foreign ownership levels will always have the potential to impact M&A activity in that market, as such decisions directly impact the extent to which an overseas investor can participate financially in, and control the affairs of, a local entity,” he explained.

“While reducing foreign ownership levels can make a jurisdiction less attractive from an international M&A perspective, it will not always result in less M&A activity. It can also open up the market to international investors (such as insurers) for whom it is more desirable to acquire a smaller stake in a local entity. It really depends on the strategy of the investor in respect of the particular market and where the specific foreign ownership levels in that market are pegged.”

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