66 Middle East Insurance Review October 2018

Takaful Market Profile – Malaysia

Bank Negara Malaysia (BNM) issued an exposure draft in May this year to revise the existing Takaful Operational Framework (TOF) to strengthen the takaful industry and foster innovation. The revised framework

aims to bring greater convergence to the use of multiple shariah standards in the models and structures of takaful, said former governor of BNM Tan Sri Muhammad Ibrahim as reported by The Star.

The TOF also aims to strengthen the governance of takaful operators, including how takaful funds are managed, and to safeguard the interest of takaful participants.

Takaful growing Family takaful grew by 10% in 2017 to MYR4.35bn, compared to MYR3.95bn in 2016.

General takaful recorded a gross contribution of MYR2.56bn, a growth of 6% compared to the previous year.

In contrast, conventional life insurance grew by 3.9% to MYR10.12bn in 2017, from MYR9.75bn. Family takaful makes up 30% of the conventional life and family takaful segment. Life insurance and family takaful penetration rate remains low at 56%, with marginal increases over the last four years.

Takaful strides forward

New regulatory requirements are expected to shake up the takaful market in Malaysia, but operators are taking these challenges in their stride, as takaful has shown better growth over conventional insurance in recent years, say Malaysian Takaful Association (MTA) and Malaysian Re.

Tak-Malaysia.indd 66 21/9/2018 11:07:38 AM

October 2018 Middle East Insurance Review 67

Takaful Market Profile – Malaysia

and greater access to takaful products that meet their needs and a better understanding of the product features through proper consultation.

Liberalisation of motor and fire tariffsMeanwhile, the phased liberalisation of motor and fire tariffs gives conventional insurers and takaful operators the flexibility to price their products based on their own assessments and profiling of policyholders. This change means that conventional insurers and takaful operators can offer consumers new products at market rates, as opposed to tariffed rates.

For the past three decades, the premiums or contributions that insurers and takaful operators can charge have been regulated by a tariff structure. It is envisaged that the flexibility for insurers and takaful operators to price their own premiums may lead to greater price competition, product innovation and customised coverage limits to the benefit of consumers. However, the converse may happen: there is a possibility of sharp upward premium adjustments and reduced access or affordability to basic protection or compulsory lines, to the detriment of consumers.

The implementation of the liberalisation is complemented with consumer awareness campaigns to educate and invite the public to play their duty as consumers – which will empower them to make the

right choices when purchasing motor and fire insurance and takaful products.

Online aggregatorsThe TOF exposure draft also proposes to allow online product aggregators to operate with broader access to the insurance and takaful markets – a natural transition facilitated by technology to meet consumers’ demand to have instant access to the information on products and services they require.

The greater transparency of choices offered by the product aggregators aims to empower consumers and this should place a greater urgency on insurers and takaful operators to be more innovative when it comes to pricing products and offering value-added benefits.

On the flipside, technology savvy operators should be able to mine the aggregators for the trends, preference and insights into buyers’ behaviour, and capitalise on the information for better decision-making.

Market response to revised TOFThe market is generally supportive of the exposure draft as it provides greater clarity of the operational framework expected of takaful operators. However, according to MTA, some areas for improvements were highlighted by the market.

Overlapping implementation timelinesThere are several ongoing guidelines/framework/exposure drafts issued by regulators with overlapping timelines which could create multiple parallel implementations that require an extensive scope of work and attention. In addition, the takaful industry is also required to look into the implementation of the International Financial Reporting Standards (IFRS) 17 – Insurance Contracts.

(The Malaysian industry standard for life and family insurance penetration uses the ratio of life insurance policies and family takaful contracts to total population.)

Family takaful recorded a higher growth rate compared to conventional life due to its lower base, having been in the market only since 1984. Conventional life insurance, which has been around much longer – has a higher base with a larger market share, hence the slower growth relative to family takaful.

The growth in family takaful is further bolstered by the increasing disposable income of the low- to middle-class Malay-Muslim population in Malaysia. There is also a higher level of consumer awareness of takaful and its benefits.

TOF proposed changes The TOF exposure draft proposes the implementation of the Life Insurance and Family Takaful Framework (commonly referred to as LIFE Framework), and the phased liberalisation of motor and fire tariffs – both of which are expected to have a major impact on the takaful landscape in Malaysia.

LIFE framework The LIFE Framework aims to: promote innovation and a more competitive market; promote higher levels of professionalism within the industry; and increase transparency in takaful products and services. These initiatives are expected to help life insurance and family takaful to achieve a penetration rate of 75% by 2020 compared to 56% in 2016.

The framework removes the limits on operating cost, diversifies distribution channels and strengthens market practices. These initiatives will give consumers a wider

MYR bn 2011 2012 2013 2014 2015 2016 2017

Family takaful 2.70 3.47 3.56 3.50 3.64 3.95 4.35

Growth (%) 4.2 28.9 2.6 –1.8 3.9 8.6 10.0

Life insurance 7.91 8.20 8.17 8.95 9.13 9.75 10.12

Growth (%) –5.8 3.6 –0.4 9.6 2.0 6.8 3.9

Takaful as % total market share 25.4 29.8 30.4 28.1 28.5 28.8 30.0

Family takaful and life insurance:Total gross contributions/premium new business

MYR bn 2011 2012 2013 2014 2015 2016 2017

General takaful 1.60 1.75 1.91 2.16 2.30 2.41 2.56

Growth (%) 21.0 9.0 9.0 13.0 6.0 5.0 6.0

General insurance 13.79 14.87 15.91 16.90 17.23 17.32 17.30

Growth (%) 8.0 7.8 7.0 6.2 2.0 0.6 –0.1

Takaful as % total market share 10.4 10.5 10.7 11.4 11.8 12.2 12.9

General takaful and general insurance:Total gross contributions/premiums

Source: Malaysian Takaful Association (MTA) and Malaysian Re

Tak-Malaysia.indd 67 21/9/2018 11:07:49 AM

68 Middle East Insurance Review October 2018

Takaful Market Profile – Malaysia

Uneven playing field with reference to conventional insurance There are additional requirements for takaful operators to adhere to compared to those for conventional insurance. This has put the takaful industry in a disadvantaged position.

The need to separate operational guidelines BNM might want to consider separate takaful operational frameworks for general takaful and family takaful, as well as retakaful. This is because certain requirements do not explicitly apply to each of these segments.

Apart from coping with overlapping implementation timelines resulting from regulatory changes, industry players are taking these challenges in their stride. Takaful operators have actively engaged the regulator to fine-tune the regulations.

What else can takaful operators do to achieve scale and strengthen the industry? Malaysian Re believes that attracting and retaining the right talents remain at the top of the list as there is a discrepancy in the talent pools of both conventional insurance and takaful. Besides the usual benefits and perks, top talents will thrive in an environment that fosters creativity and rewards appropriate risk-taking.

“Greater innovation in products and services would also serve the industry well as there is an urgent need to differentiate takaful from conventional insurance beyond the traditional shariah-compliant distinction,” said

Malaysian Re president & CEO Zainudin Ishak.

“An effective differentiation strategy will also enable the industry to broaden its traditional customer base from those who buy takaful products because of religious beliefs to those who are drawn to takaful due to the distinct benefits compared to conventional products,” he added.

Takaful forecast The splitting of the licence of takaful operators as required by the Islamic Financial Services Act (IFSA 2013) has created ‘pure play’ operators which are now very focused on their respective general or family business. This, coupled with the domestic market detariffication, is expected to lead to an elevated level of competition among takaful operators, said Malaysian Re.

“Takaful operators have been liberated from previous joint-responsibility of general/family, and armed with convergence of capital, management and core resources. These factors will enable them to pursue factors critical for the strengthening of the industry, ie, talents, technology, innovation and differentiation,” said Mr Zainudin.

In the grand scheme of things, both consumers and operators are expected to be in a win-win situation as developments in the market positively translate to better growth rates for takaful.

Mr Zainudin Ishak

The new Global Takaful Directory 2019 is a unique one-stop source of reference on who is doing what in the takaful space worldwide, with a special focus on Asia, the Middle East and North African region.

* All rates inclusive of handling and mailing charges

Pre-launch offer

Global Takaful Directory 2019

To order, please email junaid@meinsurancereview.com

Print + OnlineOrdering from:Singapore/Malaysia S$125* (U.P. S$175)Other countries US$125* (U.P. US$175)

Tak-Malaysia.indd 68 21/9/2018 11:07:59 AM