The Takaful market in Malaysia is showing steady growth and “in a very obvious way is overtaking conventional insurance” despite global financial and insurance sectors having been hit by the pernicious Covid-19 pandemic, said a London-based independent economist and writer.
In a commentary, Mushtak Parker said while the market share of Islamic banking of the total banking sector is just under 40%, the share of Takaful is way behind at 16% of the total insurance sector in Malaysia.
“But times are changing,” he said.
Parker said the Takaful industry, over the last three decades, had taken a back seat 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,” he said.
In an interview with Fitch Ratings’ Islamic banking and insurance global head Bashar Al Natoor, Parker learnt that the creation of an Islamic finance-enabling ecosystem in Malaysia is the key driver of the Takaful industry’s growth in the country.
“This makes Malaysia a leading model for the sector, especially in light of the Muslim-dominated make-up of the untapped population segment,” according to Al Natoor.
Al Natoor said the Takaful industry in Malaysia continued to enjoy faster growth than the conventional insurance sector in 2019, driven by stable domestic consumption and increasing consumer awareness.
“The growth potential is there, and we expect the industry to continue to grow at a more favourable rate than that of conventional insurance,” he said.
While noting that the more mature family Takaful is almost in line with the life insurance market, Al Natoor said 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 added.
According to Fitch, family and general Takaful premiums rose by 29.6% and 16.4% respectively in the first half of 2019 (1H19), compared with 12.2% in conventional life and -1.3% in general insurance.
Family and general Takaful premiums grew 13.1% and 8% respectively in 2018.
Fitch data also showed that the Takaful sector continued to gain ground in the Malaysian insurance market, mainly made up of family Takaful, which accounted for 35% of the overall life market based on new business premiums in 1H19, up from 32% at end-2018.
General Takaful accounted for 16% of the overall general insurance market, compared with 14% in 2018, it said.
Al Natoor said Fitch Ratings believes increasing product awareness is also a factor towards improving market penetration.
He said Bank Negara Malaysia’s (BNM) latest Financial Capability and Inclusion Demand Side Survey showed that almost half of the Malaysian population did not have protection due to a lack of awareness of the comprehensive range of solutions offered by the Takaful industry.
He, however, dismissed 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 than life insurance? It is also an issue of the maturity of the insurance industry in general where Islamic finance is active,” he said.
Going forward, Al Natoor believes that one way of unlocking Takaful's potential 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 said.
Al Natoor said other positives for the Malaysian Takaful industry going forward include the removal of limits on commission and agency expenses for investment-linked Takaful products, part of 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 International Financial Reporting Standard (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,” he added.
The Edge Markets