STUDY ON FACTORS THAT INFLUENCE FINANCIAL

PERFORMANCE OF MALAYSIAN ASSURANCE

ALLIANCE (MAA) INSURANCE

By Nusaila Johari
UTM, Skudai Johor, Malaysia
Prof. Dr. Omar Samat
UiTM, Segamat Johor, Malaysia
Dr. Dayana Farzeeha Ali
UTM, Skudai Johor, Malaysia

ABSTRACT

This study will determine the factors that can be influence to the revenue of Malaysian Assurance
Alliance Berhad (MAA) and examine the financial performance of the MAA. Generally, the
statistical tool used in the study is Regression Linear Model which is Multiple Regression Model .
This method was chosen because it predicts the value of the dependent variable based upon the
values of more independent variables .The data collected are inflation rate, interest rate,
unemployment rate and MAA revenue. The yearly ended for thirty years data taken since year
1981 until 2010 gathered from different sources such as World Bank database, Bank Negara
Malaysia database, MAA annual report and Malaysian Statistic Department database. Models are
generated by using Eview Software.

From the findings and analysis result of Multiple Linear Regression Model, the studies conclude
that there is a mixed result between independent variable to MAA revenue. There is significant
relationship between number of population and employment rate to MAA Revenue but no
significant relationship between inflation rate and interest rate to MAA Revenue.

1.0

Introduction

As a developing country, the insurance sector plays an important role in Malaysia. Insurance
encourage people in developing the habit of saving in term of generating long-term investible
funds. The nature of insurance business ensures constant inflow of funds and challenges such as
unprecedented volatility, changing customer profiles and existing regulators (Chennappa, 2009).

According to Willet (1951), insurance is defined as social tools to leverage the uncertain losses
due to exposure to some risks through the transfer of the risks of many individuals to a Group of
persons. Kulp (1956) defines insurance as formal social tools for the replacement of certainty for
unpredictability through the funding system. Insurance companies seek to provide protection
against financial losses caused by unforseen events.

There are two types of insurance in Malaysia which are Life Insurance and General Insurance.
First, Life Insurance is an insurance that commits to pay the individuals specified beneficiaries
upon a certain event such as death of the individual who is insured. The insurer needs to pay out a
certain amount of money to the beneficiaries and the coverage period for life insurance is usually
more than a year. So this requires periodic premium payments, either monthly, quarterly or
annually. The main products of life insurance include whole life, endowment, term, investmentlinked, life annuity plan and medical and health.

Second is general insurance which is basically an insurance policy that protects you against losses
and damages other than those covered by life insurance. The coverage period for most general
insurance policies and plans is usually annual-based, whereby premiums are normally paid on a
onetime basis. Motor insurance, fire/ house owners/householders insurance, personal accident
insurance, medical and health insurance and travel insurance are main products of general
insurance.

However, the life insurance market scenario in Malaysia has been inconsistent over the past few
years. This situation is affected by many factors and the biggest challenges are still unpredictable.
MAA has been chosen as this company has gone through several merging since it listed in 1985
until recent acquisition in 2011. Besides changing its ownership, it has also changed the nature
of business from conventional insurance to Takaful as a Syariah base. The reason for this change
contributed to this study. According to Roberto A. Weber (2003) he found that merging and
changing were caused by lack of competency and poor company performance. Therefore this
study expands the research to look at the factors that may influence the revenue due it a main key
to overall financial performances.
Basically there is no study previously done to Interest Rate, Population Rate, Inflation Rate and
Unemployment Rate to MAA Revenue. Most studies done are to investigate other insurance
company and not focusing in the Malaysian Insurance market industry such as a study done by

Cargill and Troxel, 1979; Browne and Kim,1993; Pajuyan and Poorpartovi,2003; and
Li,et.al,2007. Therefore the main purpose of this study is to determine macroeconomic factors
that influenced the revenue that affected MAA overall financial performance which is focus on
factor such as inflation rate, interest rate and unemployment rate.

1.1

Inflation Rate

Li et al (2007) said that life insurers are most expected to be indirectly affected by inflation. High
inflation affects the existing value of fixed future payments by creating a caution for life
insurance purchase and increase in lapse rates. Li provides empirical evidence for the negative
impact of inflation on life insurances demand and sales. During high inflation, the value of
money makes it difficult to justify current expenditures on future fixed payments that are rapidly
decreasing value. It is likely there will be an increase policy lapses and loan activity as
policyholders try to take advantage of on the higher rates of return of competing products.
Significant value reduced profitability and required significant liquidity of life insurers.
Neumann (1969) studies the impact of inflation on life insurance by using regression for the
period of 1946-1964. However, other independent variables such as income, number of marriages,
births and urban households are used to measure correlation. As a result, this study found that
inflation has insignificant impact on that economic variable such as inflation, income per capita,
banking sector development and religious and institutional indicators are the most important
indicator in life insurance consumption.
Browne and Kim (1993) and Outreville (1996) found that inflation has a significant negative
relationship with life insurance life insurance.
Beck and Webb (2003) determine the demand for life insurance in 68 economies for the period of
1961-2000. As a result, they found sales. High inflation tends to cause the purchasing of life
insurance to be less attractive due to high cost of living.
Study done by Cargill and Troxel (1979) and Rubayah and Zaidi (2000) are not parallel with the
Browne and Kim (1993) and Outreville (1996) findings. Only the moderately defined savings
model in the study of Cargill and Troxel (1979) generates a significant result with the expected
negative sign for this variable. The study found weak relationship between life insurance savings
and price expectation. Further, Rubayah and Zaidi (2000) studies show an insignificant positive
relationship between inflation rates and the demand for life insurance.

1.2

Interest Rate

The findings on the relationship between interest rates and life insurance are inadequate.
Cargill and Troxel (1979) examined two kinds of interest rates in their study which is the rival
yield on other savings products and the return by life insurers. The findings on the rival yield are

inconsistent. However, the rival yield tends to be negatively related to life insurance savings. A
higher interest rate on alternative savings products tends to cause insurance products to become
less attractive as a savings instrument. The gap variables are included to reflect the delayed
reactions of savers towards information regarding interest rates because changes in interest rates
produce a lagged response. However, the return earned by life insurers is frequently positively
related to life insurance savings. Life insurers earning a higher rate of return tend to attract
individuals to purchase insurance from them.
Outreville (1996) found sales of life insurance are not effect by the interest rates and the lending
rates. The real interest rate is obtained by deducting the expected inflation from the current bank
discount rate. On the other hand, Rubayah and Zaidi (2000) investigate three types of interest
rates in their study: the personal savings rate, short-term interest rate and current interest rate. The
personal savings rate and short-term interest rate are found to influence significantly and
negatively the demand for life insurance, while the current interest rate is found to have no
significant effect on life insurance demand. The personal savings rate refers to the interest rate
offered by banks on normal savings, the short-term interest rate refers to the interest rate on threemonth Treasury Bills, and the current interest rate refers to the base lending rate on bank
borrowings.
Sajjadi and Gholami (2008) studied the relationship between of macroeconomic variables such as
GDP, financial development, interest rate, inflation rate, and insurance rate as well as statistical
variables (life expectancy) with the demand for life insurance. The study found demand for life
insurance has a significant positive relationship with GDP and insurance rate, whereas inflation
and life expectancy has a significant negative relationship with demand.

1.3

Unemployment Rate

Unemployment rate have negative impact on life insurance as per Mantis and Farmer, Outreville,
Beenstock et al. and Lentenand Rulli.
While study done by Bhatia and Jain indicated that unemployment reduces the real demand for
life insurance. It is well evident from negative correlation between unemployment and growth in
real premium.
Lavasani (2005) studied the relationship of demand for life insurance with national per capita
income, unemployment rate, price index and per capita payable loss and he found that dependent
variable has a positive relationship with all independent variables but has a negative relationship
with price index.
Dar and Dodds (1989) explored the relationships amongst interest rates unemployment, and
net
flow
of
funds
into
endowment
life
insurance
policies and surrender activity in the United Kingdom.

2.0

Research Methodology

This study has focus on determining the factors that can influence the insurance premium that
may affect the financial performance of the company focus on revenue. Quantitative Secondary
Data will be used for the research. The data collected are inflation rates, unemployment rates,
interest rates and revenue of MAA life insurance for thirty year. Thirty years time series data
collected from 31st Dec 1981 until 31st Dec 2010 from several sources such as World Bank
database, Bank Negara Malaysia database, MAA annual report and Malaysian Statistic
Department database. Models are generated by using Eview Software.
Generally, the statistical tool used in the study is Linear Regression Model which is Multiple
Regression Model. This is because more than one independent variable is used to predict the
value of a dependent variable. According to Pearson, (1908) first user of term, the general purpose
of multiple regressions is to learn more about the relationship between several predictor
(independent) variables and a criterion (dependent) variable. Multiple regressions is a statistical
technique that allows us to predict one variable to other variables.

3.0

Result and Discussion of Finding

This result will answer objective number one; the factors that affect the level of MAA
Revenue.

3.1

Descriptive Statistic

Table 3.1

Mean

Descriptive Statistic

FR

IR

MAAR

UR

0.661692

0.368198

8.339923

0.625319

Median

0.737590

0.462140

8.619796

0.550228

Maximum

0.943989

0.986772

9.362294

0.932575

Minimum

0.298853

-0.537602

7.003696

0.388279

Std. Dev

0.197695

0.340681

0.844956

0.178411

Skewness

-0.199994

-1.011259

-0.289698

0.700302

Kurtosis

1.472037

3.834540

1.524955

1.899423

Jarque-Bera

3.326216

6.382719

3.348608

4.230617

Probability

0.189549

0.041116

0.187439

0.120596

Sum

21.17416

11.78234

266.8775

20.01021

Sum Sq. Dev 1.211588

3.597967

22.13245

0.986750

Observations 30

30

30

30

Hypothesis 1 :

H XX
0: (

and

3 )= 0

Versus

H XX X
1: (

and

3 ) 0

Table above displays the descriptive summary statistic on Interest Rate (FR), Inflation Rate (IR),
MAA Revenue (MAAR) and Unemployment Rate (UR) from 1981 to 2010. The total observation
included in the period is 30 observations. The mean for the entire variable shows positive value.
Median of all indexes is positive. The volatility of MAAR is highest as compared to the volatility
of FR, IR, and UR (measured by the standard deviation). All variables except of UR shows the
negative skew and it means the variables (MAAR, IR and FR) indicated negative skewed
distribution of data. While, UR Index shows the positive skew and it means the variable indicated

positive skewed distribution of data. The Kurtosis is not normal distribution for IR because the
value for variables is higher than the kurtosis normal value for distribution which is more than
three. Whereby, for MAAR, UR and FR which is Platykurtic distribution because the amount is
lower than three. Therefore, all the series have a Platykurtic distribution (distribution with less
peaked in the mean, and thinner tails compared to normal distributions) except for IR has
Leptokurtic Distribution (distribution with a sharper peak and fatter tails compared to normal
distribution). The Jarque-Bera values for IR index confirmed that the index do not follow a
normal distribution. These are supported by statistically significance of the Jarque-Bera Tests at
5% significant level. However, Jarque-Bera for others variable (MAAR, UR and FR) is
insignificant at any level of confidence. Therefore, Jarqua-Bera is normal distribution for all the
series of index except for IR.
3.2 Multiple Regressions Model
Table 3.2 :

Empirical Models 1

Coefficient

Value

P- Value

-1.5249

0.2187

-0.7100

0.0143

-0.0961

0.5734

-0.0418

0.2559

Sign

**

UR,MAAR

FR, MAAR

IR, MAAR

0.9915

Adjusted

0.9895

F-Stat
Durbin-Watson
Notes:

0.0000
1.9913

*** Significant at the 1% level

** Significant at the 5% level

***

MAAR

1.5249 0.0961r FR 0.0418 r IR 0.7100 rUR

(Equation 3.1)

Table 3.2 presents the result of Multiple Regression for MAA Revenue, Interest Rate, Inflation
Rate and Unemployment Rate while Equation 4.1 shows the short run regression model of MAA
Revenue against all the independent variables.
Based on the Equation, number of population and unemployment rate show a positive relationship
with MAAR. Meanwhile, other variables such as inflation rate and interest rate are not significant
at 5% level.
3.2.1

Inflation Rate

The coefficient value of inflation is -0.0418. This value shows that for one percent
decrease in inflation, MAA Revenue will increase by 0.0418 percent assuming other
variables remain constant. The p-value of inflation is 0.2559, which is more than 5% level
of significance. Therefore, the finding shows that, it is fail to reject the null hypothesis
and conclude that there is no relationship (significant) between inflation and MAA
Revenue.
3.2.2

Unemployment Rate

The coefficient value of unemployment rate is -0.7100. This value shows that for one
percent decrease in unemployment rate, MAA Revenue will increase by 0.7100 percent
assuming other variables remain constant. The p-value of unemployment rate is 0.0143,
which is less than 5% level of significance. Therefore, the finding shows that, it is reject
the null hypothesis and conclude that there is relationship (significant) between
unemployment rate and MAA Revenue.
3.2.3

Interest Rate

The coefficient value of interest rate is -0.0961. This value shows that for one percent
decrease in interest rate, MAA Revenue will increase by 0.0961 percent assuming other
variables remain constant. The p-value of interest rate is 0.5734, which is more than 5%
level of significance. Therefore, the finding shows that, it is failed to reject the null
hypothesis and conclude that there is no relationship (significant) between interest rate
and MAA Revenue.

3.2.4

F-test

The P-value of the F-test is 0.0000 which is significant at 5% level of significance.

Therefore, this study rejects the null hypothesis. Based on this F-Test result, conclude that
at least one of independent variable are significant at 5% significant level and affect to
MAA Revenue.

3.2.5

Coefficient of Determination (R)

The value of R obtained is 0.9915 which means only 99.15% of the MAA Revenue is
explained by the chosen independent variable namely inflation rate, interest rate,
unemployment rate and number of population. The remainder 0.85% of the variation is
determined by other factors.

3.2.6

Adjusted R

As observed from the regression result, adjusted R is 0.9895. This indicate that 98.95%
of variation in MAA Revenue is explained by the independent variable namely inflation
rate, interest rate and unemployment rate.
3.2.7

Durbin-Watson Test

The result of the regression indicates a Durbin-Watson statistic of 1.9913, which means
that it is consistent with no serial correlation in the residuals of the estimated Equation.
This can be confirmed by observing the outcome of the Autocorrelation test conducted
under Breush-Godfrey Serial Correlation LM test which provided same result.

3.3

SUMMARY OF HYPOTHESIS STATEMENTS

3.3.1

Main Hypothesis Statement

The P-value of the F-test is 0.0000 is 0.0000, which is less than 5% significance
level. Therefore, the finding is fail to reject the null hypothesis statement and can

be concludes that there is a significant influence by those selected independent

variables.
3.3.2

Specific Hypothesis Statements

3.3.2.1 Inflation Rate

The p-value of GDP is 0.2559, which is slightly more than 5% level of
significance. Therefore, the finding shows that, it is fail to reject the null
hypothesis and conclude that there is no relationship between inflation and MAA
Revenue.
3.3.2.2 Unemployment Rate
The p-value of unemployment rate is 0.0143, which is less than 5% level of
significance. Therefore, the finding shows that, it is reject the null hypothesis and
conclude that there is relationship between unemployment rate and MAA
Revenue.
3.3.2.3 Interest Rate
The p-value of interest rate is 0.5734, which is more than 5% level of
significance. Therefore, the finding shows that, it is failed to reject the null
hypothesis and conclude that there is no relationship (significant) between
interest rate and MAA Revenue.

4.0

Conclusion

Empirical results from this study have provided valuable insight for answer to the problem
statement and hypothesis statement of this research study. Using the bases of 5% significance
level by accept either null or alternate hypothesis.
The result of this study indicates that inflation rate does not have significant relationship with
MAA Revenue. Finding show that p-value of inflation rate is 0.2559 which is insignificant at 5%
significant level. Some econometricians would consider a variable with p-value between 0.05 to
0.10 to be weakly significant rather than in significant. This result is parallel with study done by
Neumann (1969) which found that inflation has insignificant impact on life insurance. Besides
that, Rubayah and Zaidi (2000) studies show an insignificant relationship between inflation rates
and the demand for life insurance. In contrast, study done by Browne and Kim (1993) and
Outreville (1996) found that inflation has a significant negative relationship with life insurance
sales. High inflation tends to cause the purchasing of life insurance to be less attractive due to
high cost of living.

This study found that unemployment rate has significant relationship with MAA Revenue. Result
show that unemployment rate is significant at the 5% significant level which p-value is 0.0143.
Some econometricians would consider a variable with p-value between 0.05 to 0.10 to be weakly
significant rather than in significant. This study has been proved that unemployment rate is
parallel with the inflows of MAA Revenue and expert positive influence on the MAA Revenue.
The result on this study parallel with study done by Lavasani (2005) indicated that unemployment
rate has significant positive effect to the demand for life insurance.
The finding of this study indicating that interest rate does not have significant relationship with
MAA Revenue. Finding show that p-value of interest rate is 0.5734 which is insignificant at 5%
significant level. Some econometricians would consider a variable with p-value between 0.05 to
0.10 to be weakly significant rather than in significant. This finding contribute the same result
with research done previously by Outreville (1996) which indicated that sales of life insurance are
not effect by the interest rates.
Based on Multiple Linear Regression Model concept, there is significant relationship between
independent variable to dependent variable if at least one of independent variable is significant at
5% significant level. Since unemployment rate has significant relationship with MAA Revenue,
therefore, this study found that there is significant relationship between independent variable to
dependent variable. Means that, if at least one of the independent variable (interest rate, inflation
and unemployment rate) increase or decrease, it will affect to MAA Revenue.
Overall, the results of the study showed that 98.95% of MAA Revenue was explained by these
three selected macroeconomic variables. This is strong enough to explain that, these three
variables are affect to MAA Revenue. Therefore, it is important for MAA management, investor
and policy holder to consider on this factor for any decision making process.
First, it will be beneficial to MAA in finding the factors that influence the revenue that will affect
the overall financial performance. The findings may help MAA to make considerations for future
planning to apply in its strategic planning. This study hopes that the findings shall be used to
assist MAA to determine the root cause of the problem and implement the recommendations in
winning the companys clients and hence, boost its sales in meeting the target sales of the year.
There are three suggestions to improve future research related to this study. The first suggestion is
to involve more countries other than Malaysia. The various countries such as other Asian
countries will give a better view about the insurance market industry. The second suggestion in
order to improve future research is using other model in finding out the relationship between
economic variable with sales of insurance company. This study concentrates on Multiple
Regression Model. Further research can use multivariate GARCH framework model Multivariate
VAR Model. The third suggestion for future research is to extend the period of analysis such as
monthly basis, quarterly basis or semi-annually basis. The longer periods are taken to analyze, the
better view and finding results.

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