Malaysia: Takaful Insurance

Preliminary data released by Bank Negara Malaysia, the central bank, confirm that Malaysia's Takaful market is making similarly impressive growth progress as the Islamic banking and capital market sectors. While the Islamic banking market share of the total banking market has reached over 22 percent in terms of deposits, assets and financing, and the size of the Islamic capital market surpassed the 1 trillion ringgit mark at the end of 2010, the Takaful market is relatively much smaller compared to the conventional insurance market and hence its base is much lower.

According to the Bank Negara Malaysia 2010 Financial Stability Report, which is published with the central bank's annual report and was recently released, total income for family Takaful increased from 3,381.6 million ringgit in fiscal year ending Dec. 31, 2009 to 4,030.2 million ringgit for the same period in 2010. This included net contributions for family Takaful which increased from 2,719.8 million ringgit to 3,326.9 million ringgit; net investment income which similarly increased from 354.8 million ringgit to 451.6 million ringgit for the same period; and profit on sale of assets which decreased from 307.1 million ringgit in 2009 to 251.8 million ringgit in 2010.

The net outgo for family Takaful increased from 1,718.5 ringgit to 2,640.1 million ringgit, the excess income over outgo decreased from 1,663.2 million ringgit to 1,390.2 million ringgit in the same period respectively.

For General Takaful at the same time, the underwriting profit declined from 170.1 million ringgit to 145.8 million ringgit, although the operating profit of Takaful providers in Malaysia increased from 247.5 million ringgit to 272.4 million ringgit for the same period. Investment income for General Takaful also increased from 57.7 million ringgit to 67.9 million ringgit respectively.

According to Bank Negara, the insurance and Takaful sectors in Malaysia sustained domestic demand for savings and protection products and the improved performance of the equity market supported stronger results for the year. Business growth was primarily driven by a strong recovery in demand for investment-linked products, and higher demand for ordinary life protections as well as motor and fire insurance. Payout of benefits and claims as a percentage of premiums increased slightly to 58.1 percent for the life business and 62.3 percent for the general business.

For the year as a whole, aggregate excess income over outgo for the life and family Takaful industry improved to 14.1 billion ringgit (an increase of 12.1 percent on the year) whilst the general sector recorded operating profits of 2.2 billion ringgit (up by 3.5 percent). Capitalization of the insurance industry remained strong with a capital adequacy ratio (CAR) of 224.6 percent in 2010 compared with 225.7 percent in 2009.

According to Bank Negara, the industry experienced a compound average growth rate of 27 percent in terms of net contributions between 2005-2010 with family Takaful driving the growth at 28 percent for the same period to dominate more than 80 percent of the total Takaful market in 2010. This strong growth momentum is expected to continue, underpinned by the rising affluence of Malaysians amidst strong economic fundamentals. Given the large untapped market that still exists with only 54 percent of the population having a life insurance or Family Takaful policy, the Takaful industry in Malaysia is poised to benefit in the years ahead on the back of steady demand.

The encouraging preliminary Takaful results for 2010 coincided with the launch in April 2011 of the latest Takaful company in Malaysia, namely ING Public Takaful Ehsan, which is a joint venture between the Malaysian subsidiary of ING, the Dutch financial services group, ING Management Holdings (M) Sdn Bhd, and the local Public Bank Bhd and Public Islamic Bank Berhad.

Bank Negara Malaysia (BNM) Deputy Gov. Mohd Razif bin Abd Kadir, speaking at the launch of ING Public Takaful Ehsan in Kuala Lumpur, stressed that the venture signifies yet another milestone in Malaysia's continuous endeavor to provide a sufficient financial safety net for the general population and to promote the development of a progressive and flexible Takaful industry in an increasingly challenging global environment.

"With this strategic alliance between two financial groups of such caliber," added the deputy governor, "Bank Negara Malaysia looks forward to strong management stewardship, innovative product offerings, wide distribution channels, operational and service excellence as well as breakthrough business strategies that are well-matched by robust risk management capabilities."

Takaful Players
In fact, another international-local Takaful joint venture is scheduled to come to enter the market in 2011 following the approval last year by Malaysian Finance Minister Mohd Najib Abdul Razak, who is also the prime minister, of the four new joint venture family Takaful licenses under the Takaful Act 1984. This was part of Malaysia's ongoing financial liberalization of its Islamic finance sector, which was announced by Prime Minister Najib in April 2009.

Thus far, three of the four have launched operations including AIA AFG Takaful Berhad, a joint venture between American International Assurance Berhad and Alliance Bank Malaysia Berhad; ING Public Takaful Ehsan; and the joint venture between AMMB Holdings Berhad and Friends Provident Group plc, UK; just leaving the joint venture between The Great Eastern Life Assurance Company Limited and Koperasi Angkatan Tentera Malaysia Berhad the only one to start operations.

This brings the number of Takaful operators in Malaysia to 12. The other Takaful operators include CIMB Aviva Takaful Berhad, Etiqa Takaful Berhad, Hong Leong Tokio Marine Takaful Berhad, HSBC Amanah Takaful (Malaysia) Sdn Bhd, MAA Takaful Berhad, Prudential BSN Takaful Berhad, Syarikat Takaful Malaysia Berhad and Takaful Ikhlas Sdn. Bhd. Further international interest in Malaysia's Takaful market is the 35 percent equity stake being finalised by Japan's Mitsui Sumitomo in Hong Leong Tokio Marine Takaful Berhad.

In addition, Malaysia also has four Retakaful Operators, namely ACR Retakaful SEA Berhad, MNRB Retakaful Berhad, Munchener Ruckversicherungs-Gesellschaft (Munich Re Retakaful) and Swiss Reinsurance Company Ltd. (Swiss Re Retakaful); and one International Takaful Operator in AIA Takaful International Bhd. In addition, there is also strong presence of the Takaful industry in the Labuan International Business and Financial Centre, where there are 14 Retakaful operators incorporated.

Malaysia has the single largest Takaful market in the world with an estimated 26 percent of global Takaful assets, which according to Bank Negara Malaysia totaled 12,445.4 million ringgit in 2009.

Opportunity
Deputy Gov. Mohd Razif identified three dimensions from which strong opportunities for growth can be harnessed in the Takaful industry. The first one is the opportunity to penetrate the remaining underserved areas in family Takaful, especially medical and health Takaful, which in 2010 constituted only 9 percent of new family Takaful business.

The second dimension of growth relates to the transformation of Malaysia as a high income economy. With Islamic finance specifically identified as one of new growth areas under this new economic model, the Takaful industry stands to gain from this socio-economic transformation by seizing the opportunity to grow business beyond the more traditional business lines. This entails broadening product offerings to include bespoke and more sophisticated investment-linked and wealth-management products aimed at more affluent customers. At the other end of product spectrum, there should also be more emphasis to cover low-income individuals via microtakaful.

The third dimension of growth relates to the opportunities to be harnessed under the Malaysia International Islamic Financial Centre (MIFC) initiative which seeks to enhance the international dimension of Malaysia's Islamic finance proposition. "This presents a huge window of opportunity for our Takaful operators to accelerate their regional and global orientation and move up the global value chains. It is therefore important for strategic international partners such as ING to explore all possible avenues to elevate the business potential of Takaful internationally," he stressed.

Other factors critical to the successful development of the Takaful industry include human capital development; ensuring that Shariah governance and compliance remains at the heart of governance and business operations; the adoption of the highest level of professionalism and good market conduct; the ability of Takaful operators to deliver products which appeal to both Muslim and non-Muslims, whether corporates or individuals; and the adoption of a strong risk management culture in the light of the changing regulatory landscape towards risk-based capital, which is soon to be implemented for the Malaysian Takaful industry.