OREANDA-NEWS. The recent heavy flooding in several Malaysian states is not expected to affect the country's insurers or excessively strain their financial performance, says Fitch Ratings. The Malaysian insurance industry maintains a strong level of capitalisation, and existing capital buffers should be sufficient to cushion any losses without having a significant credit impact.

The Malaysian government has estimated that direct flood losses in the five affected states could total up to MYR2bn (USD560m). However, the economic losses associated with the natural disaster are likely to be much higher than the insured losses. This will be due in part to the low insurance penetration rate in Malaysia and the areas affected in particular. The non-life insurance penetration rate was around 1.7% in 2013, according to Swiss Re, and is likely to be even lower in the suburban districts which were most significantly damaged. Flood damages are not automatically covered in standard comprehensive motor and fire insurance policies in Malaysia, which should also lower the potential insured losses.

Flood claims are still ongoing, and there is still scope for brokers and adjusters to upwardly adjust loss figures - considering the significant damage to public infrastructure and economic activity in east coast states including the key rubber, oil palm and agriculture sectors.

Even so, the likelihood of further revisions having a major credit impact is low. History indicates that such claims from seasonal floods are likely to be manageable for the industry. Furthermore, Fitch's rated insurers have purchased reinsurance coverage to protect themselves against adverse catastrophe losses. More importantly, Malaysian insurers are protected by a regulatory capital adequacy ratio of about 250% as of end-June 2014 - almost double the regulatory minimum required of 130%. Notably, insurers tend to maintain risk-based capital ratios in excess of internal target capital levels.

The sector's strong capital levels are an important factor in positioning for relatively robust growth. The prospects for premium growth remain relatively strong, underpinned by low penetration rates, a growing middle class, and heightened insurance awareness in those areas with faster urbanisation.

Yet as the sector grows, insurers will need to enhance their risk management practices and modelling to better assess natural disaster risks, as underscored by the recent flooding. Growing urbanisation and weather uncertainty related to climate change is likely to raise the risks to insurers from flooding over the medium and long term. As such, detailed mapping of flood-prone zones, and better assessment of the probabilities and impact from meteorological data, will help insurers to price flood risk better, provide flood coverage and mitigate adverse flood losses.