The 2019 Malaysian budget had a few items of interest to insurers and takaful operators. One was the separation of tax relief. In 2018 the total tax relief for insurance/takaful as well as EPF was RM6,000 whereas in 2019 this tax relief is split as RM3,000 for insurance/takaful and RM4,000 for EPF. Which methodology is better will depend on your income level as well as whether you are self-employed.
If you are self-employed, you had your RM6,000 total deduction effectively reduced to RM3,000, as you generally did not pay EPF anyway. If you are well into the B40 (lower wage earners), say salary of RM1,500 per month, you would pay EPF of RM1,980. And add that to the RM3,000 insurance/takaful deduction gives RM4,980, less than the former total deduction of RM6,000. On the other hand if you are towards the upper end of the B40, say salary of RM3,000 per month, you would pay EPF of RM3,960. And add that to the RM3,000 insurance/takaful deduction gives RM6,960, and increase of RM960 from the former calculation. Salaries above this will reach the maximum increase of RM1,000.
The effect of this tax relief will depend on your tax bracket. For instance using the tax rates for the 2017 year of assessment, at a salary of RM3,000 per month, the annual savings in taxes is RM48 whereas at a salary of RM6,000 per month (M40 level), the savings is RM160 and at RM14,000 (T20 level), the savings is RM240 (calculations done with some simplifying assumptions).
The second item of interest was the announcement of a critical illness fund called Dana Perlindungan Kesihatan Nasional B40, where free coverage is provided for up to RM8,000 for key critical illnesses and up to 14 days of hospitalization cover at RM50 per day. We do not yet know the details of the workings of this fund other than that Great Eastern Life (GELM) has agreed to contribute the initial seed funding of RM2 billion and that the fund will be managed by Bank Negara Malaysia. What is hopeful for this scheme is the comment by the Finance Minister Lim Guan Eng, that other foreign insurance companies can do similarly to gain exemption from the need to divest their holdings to 70%, meaning there could be additional funding for assisting the B40 in Malaysia. The finance minister rightly pointed out that divesting to 70% would benefit only a few local institutions but this funding will help millions.
The profit attributable to shareholders in 2017 of GELM was RM792.6 million, 30% of which is RM237 million. It will be interesting to see the stance of other insurers in a similar position, namely Prudential Assurance Malaysia (net profit of RM433 million in 2017) and Tokio Marine Life Malaysia (net profit of RM82.5 million). Whilst the details of how RM2 billion was determined has not been revealed, we can compare this RM2 billion with the projected growth of the 30% share of profits to see how many years it might take to break even. Over the past five years, the profit attributable to shareholders for GELM has grown by 4.3% per annum, so assuming this growth rate and taking the present value at 8.75%, which is the discount rate used in calculated the embedded value of GELM (Great Eastern Holdings annual report 2017), it will take approximately 10 years to break even.
