LONDON: Notwithstanding the extraordinary and ‘once-in-a-century’ caveat of the fallout of the pernicious COVID-19 pandemic on the global financial and insurance sectors, Malaysia being no exception, the Takaful market in Malaysia is showing steady growth and “in a very obvious way is overtaking conventional insurance”.

Takaful, over the last three decades, had taken a backseat to Islamic banking in terms of its development, market penetration and share, and compared with conventional insurance.

But, according to international rating agency Fitch Ratings, there are signs that Takaful is finally making inroads in a market that ought to be its natural financial habitat. While the market share of Islamic banking of the total banking sector is just under 40 per cent, the share of Takaful is way behind at 16 per cent of the total insurance sector in Malaysia.

But times are changing.

Potential for growth

“Takaful in Malaysia in 2019 continued to enjoy faster growth than the conventional insurance sector, driven by stable domestic consumption and increasing consumer awareness,” explains Bashar Al Natoor, Global Head of Islamic Banking and Insurance at Fitch Ratings.

“The growth potential is there. We expect the industry to continue to grow at a more favourable rate than conventional insurance. The more mature Family Takaful is almost in line with the life insurance market. General Takaful is lagging behind but that is not unusual. If compared with other Islamic finance markets, the gap between Takaful and conventional insurance is nowhere closer,” he adds.

According to Fitch, family and general Takaful premiums rose by 29.6 per cent and 16.4 per cent, respectively, in First Half (FH) 2019 (13.1 per cent and 8 per cent in 2018), compared with 12.2 per cent in conventional life and -1.3 per cent in general insurance.

The Takaful sector continues to gain ground in the Malaysian insurance market, mainly made up of Family Takaful (life insurance, etc.), which accounted for 35 per cent of the overall life market based on new business premiums in FH19, up from 32 per cent at end-2018.

General Takaful (motor, fire, third party, marine, liability, contractors’ risk, workers compensation, health and personal accident, etc.) accounted for 16 per cent of the overall general insurance market (2018: 14 per cent).

Bank Negara Malaysia statistics

The Bank Negara Malaysia (BNM) latest annual Financial Stability Report shows that Takaful fund assets totalled RM34.522 billion in FH19, increasing to RM36.5223 billion in Second Half (SH) 2019. Its market share of the total insurance and Takaful industry stood at 11.2 per cent at end-2019.

The Takaful sector’s net contribution income at end-2019 stood at RM5.5424 billion, accounting for 17.6 per cent of the total insurance market contributions, with Family Takaful once again dominating.

Similarly, new business contributions for Family Takaful amounted to RM2.904 billion at end SH2019; and the Gross Direct Contributions for General Takaful totalled RM1.6772 billion and the Claims Ratio rose from 56.6 per cent at end-FH2019 to 59.5 per cent at end SH2019, according to the latest BNM figures.

Al Natoor stresses that if one compares the Malaysian Takaful industry performance and prospects in 2019 and beyond with other active Islamic finance markets, in terms of regulatory framework, sophistication of products and market penetration, specifically when it comes to Family Takaful, Malaysia is second to none. This gives more depth to the market in terms of its offering.

“If you compare it with Saudi Arabia, where all insurance products must not contradict with the principles of Syariah – with that in mind they have cooperative insurance which could be considered as Syariah-compliant at least from a regulatory point of view, the market is mainly driven by General Takaful – health and car insurance where it is mandatory by law,” he maintains.

Malaysia, a leading model

Fitch has identified several growth drivers of the Malaysian Takaful sector.

“The creation of an Islamic finance-enabling ecosystem is the key driver of the Takaful industry’s growth. This makes Malaysia a leading model for the sector, especially in light of the Muslim-dominated make-up of the untapped population segment.

“Fitch Ratings believes increasing product awareness is also a factor towards improving market penetration. The BNM Financial Capability and Inclusion Demand Side Survey showed that almost half of the Malaysian population does not have protection due to a lack of awareness on the comprehensive range of solutions offered by the Takaful industry,” observes Al Natoor.

He dismisses any notion of an underlying leftover cultural stigma against insurance among sections of Muslim societies that future risks cannot be ‘insured’ except by Allah.

“I would not call it a cultural stigma. I would call it a lack of awareness and confidence, lack of awareness that you have a product that is Syariah-compliant Takaful. Lack of confidence in the market where people are questioning whether this is really Syariah-compliant or not, and is it really different to life insurance? It is also an issue of the maturity of the insurance industry in general where Islamic finance is active,” he contends.

Developed healthcare system

In the Gulf Cooperation Council (GCC) region, the insurance and Takaful industries are not mature enough to accommodate depth. Other key barriers to entry is having the right and complete regulatory framework and ecosystems in place when it comes to supporting Takaful.

Another point when comparing Malaysia to the GCC market is that the former has a (captive) population, a developed healthcare system and a sound pension industry which feeds into a developed family Takaful and life insurance industry in general.

In the GCC, in contrast, there is a substantial expatriate community where they don’t have the pension scheme infrastructure. Not surprisingly, Family Takaful is a small portion of the Takaful mix, whereas General Takaful is mainly driven by health and car insurance driven in turn by mandatory regulation.

An expat cannot renew his residency permit without getting health insurance and cannot renew his car registration without getting car insurance. That is why you have a reverse model when you compare the GCC model with Malaysia.

Digitalisation

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Going forward, one way of unlocking the Takaful potential, according to Al Natoor, is through digitalisation.

“Fitch believes the increasing use of digital applications can be a growth catalyst for the Takaful industry. Virtual or peer-to-peer Takaful providers that are tech-enabled may allow Takaful companies to provide services at a lower cost and be more flexible and customer-centric while also penetrating new areas,” he stresses.

However, he warns that digitisation could be an advantage or disadvantage depending on how it is utilised, given the inflexibility of insurance in general.

Currently, the market has products such as InsurtechTakaful, which is a basic application where one goes online to renew a policy. There are not many sophisticated applications both in the Takaful and conventional insurance sectors.

There are several parts of the Takaful industry that that could be helped by the Fintech side, especially in improving market penetration and increasing awareness that could put the Takaful industry in a more competitive way than other operators.

Market share

Al Natoor agrees that over the years the upward growth trajectory of Takaful per se, including in Malaysia, has been very slow especially in overall market share and depth.

“If you look at Islamic banking in Malaysia, the share of total financing is 55 per cent. If you look at family and general Takaful premiums, the share is 29 per cent in FH2019. This is not unique to Malaysia and in countries where you have an emerging Takaful industry that is following up on the finance side. The usual face of Islamic finance is Islamic banking, then other pillars – Sukuk, Takaful, and then mutual funds,” he adds.

The Takaful market in general is concentrated on family and general Takaful. But absent from the market are products which are equally important and in some respects with greater potential especially in playing a credit enhancement role in commercial trade, investment and in Sukuk issuance.

These include commercial credit risk insurance, export import credit insurance, catastrophe insurance, investment (political risk) insurance, climate change risks – potentially multi-billion ringgit business opportunities.

The lone flagbearer for some such products is the Islamic Corporation for the Insurance of Investment & Export Credit (ICIEC), the export credit insurance agency of the Islamic Development (IsDB) Group, of which Malaysia is a founding member.

The potential is proven. ICIEC alone recorded new business insured of US$10.84 billion in 2019.

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Lack of awareness

The main reason for this, contends Al Natoor, is the lack of a mature and sophisticated corporate Takaful industry in countries where Islamic finance is active to accommodate the depth and width that is needed by this sophisticated customer segment. The flip side is the lack of awareness and appetite for such products from commercial and corporate customers in the IsDB member countries.

“The other barrier – even if you look at conventional insurance in countries where Islamic finance is active, it is still lagging behind. The initial appetite of corporate customers is to go the extra mile to get Takaful cover. But unless there is an actual mandatory requirement to use Syariah-compliant insurance, the competition you have is a more established insurance industry normally that can accommodate these corporates with conventional alternatives. That is a barrier,” he explains.

“But how many ICIECs do we have, albeit its business model as a multilateral agency is different? Exactly, we need to have more private sector players in this market segment,” he stresses.

Trust and track record

He agrees there is definitely a potential for intra-Islamic trade, export import. Economies where Islamic finance is active are not small and the potential is there. But the reality on the ground is that the usage of these Takaful products in the corporate world continues to be limited because of a more established global industry.

“Yes, you can have these sophisticated products, but you need to build trust and track record. That needs momentum and time. I don’t expect that to happen in the medium term. This would be more of a long-term objective or challenge,” observes Al Natoor.

Other positives for the Malaysian Takaful industry going forward, according to Fitch, include the removal of limits on commission and agency expenses for investment-linked Takaful products, part of the BNM’s plan to develop the industry, and which came into effect in January 2020.

“We think the deregulation of operating cost-control limits will provide flexibility for Takaful operators to manage their operating expenses and encourage greater competition.

“Nevertheless, they continue to face uncertainty over the interpretation and application of IFRS 17 to their business as the January 2021 implementation deadline draws nearer.

“The selection of measurement models and treatment of various funds will have to be resolved,” adds the rating agency.

-- BERNAMA

Mushtak Parker is an independent economist and writer.