Notwithstanding this wider reach, life insurance coverage has remained relatively low compared with the more developed markets in the region such as the Republic of Korea, Singapore and Japan which reported penetration rates of more than 80%. Given the vast untapped market potential and the increased product innovation and new distribution channels, the life insurance penetration in Malaysia is expected to strengthen. Demographic changes leading to a growing ageing population has been a growing concern in many countries. Given the trends in rising life expectancy and falling birth rates, responding to the increased challenges of retirement financing has been high on the nation's socio-economic development agenda. Going forward, there will be greater interest in private pension schemes representing an are of significant growth opportunities for life insurers. The financial performance of the Malaysian insurance industry has also continued to be impressive during the 2000 and 2005 despite the challenging underwriting and investment conditions, with growth primarily driven by the life sector. Total insurance fund assets of the industry grew at an average  BIS Review 55/2006  3  annual rate of 13.8%. The insurance industry also increased in importance as a component of the economy and financial system. The ratio of total industry assets to nominal GNP rose from 16.1% in 2000 to 20.4% in 2005, while the ratio to total assets of the financial system continued on an upward trend from 4.0% in 2000 to 5.1% in 2005.

Benefits of foreign direct investment are manifold ranging from efficiency gains brought about by new technologies to the introduction of innovative products and management techniques. Further, more advanced research and development facilities and adoption of best practices from more matured financial markets will contribute to the transfer of skills and knowledge, adoption of sound risk management culture, technology and ideas in the domestic financial system. Another consideration in the liberalisation process is that of promoting financial inclusion, where all segments of society will have access to adequate financial services. The wide branch network of domestic banking institutions has ensured that non-urban areas have access to banking services, thereby eliminating the use of informal financial services. Domestic banking institutions with large presence in the non-urban areas, some as high as 20% of total branches, have succeeded in achieving sustainable performance while meeting this objective. Locally incorporated foreign banks are however located mainly in major cities and serve only certain segments of the banking public. A wider dispersion of branches of locally-incorporated foreign banks across the country would contribute towards achieving greater financial inclusion. For further expansion outside major cities to be a commercially viable proposition, it is recognised that the attainment of critical mass is essential. In this  6  BIS Review 55/2006  regard, in addition to the flexibility accorded to establish up to four new branches, consideration will be given to allow for greater presence in the non-urban areas and to serve the segments of the economy which are currently underserved.