Retirement In Malaysia

Retirement may not be the foremost concern for young adults in the prime of their lives. But that does not mean they are oblivious to the fact that they may need to have financial reserves for a rainy day.

FOR many young adults, retirement is not something they are thinking about at this stage of their lives. Those who have been working for less than 10 years have only recently begun to establish their careers, so foremost on their mind would be working to achieve success in their respective vocations.

For them, life still has a lot to offer, and the process of winding down an active lifestyle and retiring is, quite simply, not high on their list of things to do.

According to the findings of the AXA Retirement Scope 2010, a global retirement study conducted across 26 countries in Europe, the United States and Asia, the percentage of the Malaysian working population who have started preparing for their retirement has declined from 48% in 2007 to 38% in 2010. The study also shows that among the 38% who have started to prepare for retirement, most of them did so only at or near age of 40. Meanwhile, 46% said they would start to prepare for retirement when they hit 50.

Among the young, only one in five has started to prepare for retirement. Most of them do plan to start but rather late, at age 46.

Take for example, Anusya Sree, 28, who got married late last year.

“Retirement is not something I am thinking about at the moment; and isn’t it a negative thought with so much yet to do? I am only just experiencing life as a married woman. I am looking forward to spending many happy years with my husband and raising a family of our own,” says the bank executive.

For Anusya, her priority now is to ensure she has a successful career.

“I have been working for five years, and am enjoying the thrill of being an independent working adult. I have not even decided when I will have children, much less when I will retire.”

Similarly for Nicole Tan, 26, a producer for an online travel web portal, retirement is not high on her list of priorities at the moment.

“No, I have not started planning. I would like to build up my career so I have a good platform from where I can start planning for retirement. I am saving up to buy my first property, if that counts.”

However, she is aware that having sufficient funds in her retirement years will require a large amount of money.

“It would be an astronomical amount. I am not capable of reaching even 10% of it at the moment,” says Tan.

Findings of the AXA Retirement Scope 2010 survey confirm the general perception that only 14% of the Malaysian working population know exactly how much their retirement income should be.

However, not all young adults are focused on the here and now.

Badrulsyah, 35, for example, started planning for his eventual retirement five years ago.




“It is vital for one to start planning early. I learnt that if you leave it to the last minute, you will not have enough time to build up sufficient funds.

“I also know I cannot count on EPF savings alone. After making withdrawals to buy a house, for example, there is even less money to last through the retirement years,” says the self-employed entrepreneur.

The AXA Retirement Scope 2010 survey findings show that the working segment’s (especially young and mid-life) level of confidence in their own amount of retirement income suffered a big drop from 2007. Only 37% of the working population now consider their future income to be sufficient compared with 62% in 2007.

Badrulsyah roughly estimates that he will need about RM750,000 in his retirement fund and if invested wisely, should generate an income stream of its own.

“I try to put away 50% of my income every month, and this includes EPF contributions, insurance premiums, property investments and more.

“However, it is not easy as there are other obligations such as the house and car loans, utility bills and food expenditure,” he says.

Lee Yun-Han, 25, is one who had his life mapped out from when he was still in secondary school.

“I came up with my lifetime plan 10 years ago – become a professional chartered accountant, work my way up the corporate ladder and become the CEO of a listed company.”

Lee saysthe accounting path did not work out so well, but his plan is still on course.

“I modified my plan, and today I work as a management consultant. I am now in step two of my plan, and remain hopeful that I will reach step three before I retire.”

Lee also believes it is crucial to start planning early.

“Life goes by really fast, and before you know it, retirement is just around the corner. I have now lived a quarter of a century, and the time seems to have passed in a blink of the eye. With another blink, I will be 50, and in a third blink, I could be pushing up daisies (deceased).”

Lee has done his homework on how much he will need for retirement.

“I estimate that I will require at least RM5.1mil, assuming that I live for another 35 years and need RM5,000 a month to get by.

“I make a conscious effort not only to save, but also to grow my savings by investing in a diversified portfolio of shares and property.

“Right now, 50% of my income goes to servicing my loans on investment properties, 30% to bills, and 20% to cash reserves. There is a separate slush fund for girlfriend expenditure that is not on the books,” quips Lee.

Furthermore, not everyone who is not planning for retirement is living an extravagant lifestyle.

Anusya says that she does not spend money freely.

“Money is hard to come by – that much I have realised over the past few years. I realise now that I am more careful with my own money than I was when getting hand-outs from my parents!”

She says that she does buy the occasional piece of designer wear and her husband sports the latest-generation mobile phone.

“We like to enjoy life, and if this means spending money, then we will. But we only do so after the bills have been paid and there is money to spare.”

Anusya also says that they have other financial priorities besides retirement planning.

“We are saving to buy our own house, and also need a second car. Even after we have enough for that, there is the family issue to think about.

“Quite frankly, I do not see a distinction between the act of saving money and planning for retirement. We put some money away every month for what we call our ‘emergency’ fund, so isn’t that the same?”

Similarly, Tan likes to enjoy life, and she has a passion for visiting new places.

“I have an addiction to travel, so there’s quite a heavy monthly expense there. But I try to save about RM1,000 to RM2,000 every month.”

She says that she does not have any fixed monthly commitments now, but she expects more of them in future. That could be one of the reasons she still puts money away whenever possible, and not necessarily for retirement.

“I started saving five years ago when I got my first full-time job. I would feel insecure if I had no savings. We will always need to save for that rainy day that could hit us anytime – be it being stuck in a period of unemployment, or hospitalisation fees for a close family member, or to cover for those days when we just want to quit and travel the world,” she says.

Ultimately, those interviewed wished that their retirement will come at a time they choose, and not be forced upon them.

“The retirement age is something forced upon you by virtue of policy and legislation. If you enjoy and love what you do, it becomes a passion – and you do not retire from a passion,” says Lee.

“I would want to continue working past the retirement age of 55 – not because of the money, but because I would be able to contribute so much more to society. I would very much want to keep my body active, my mind sharp, and my spirit alive.”

But for Linda Eng, 31, an administration executive with a construction company, retirement planning is not just about saving.

“Yes, I have my own contingency fund for my retirement, i.e. savings in the bank, a small investment amount in unit trust funds and, of course, EPF. I am now planning to buy a house for my retirement. So, I have to work hard to ensure that my retirement life is well planned.

“Recently, however, something happened that made me realise only having savings is not enough. I need to also protect what I have saved.”

She explains that one of her colleagues who seemed to be in perfect health, ate well and kept a balanced lifestyle was diagnosed with cancer.

“It was a terrible shock to all of us, and what was even more shocking was that he had to spend close to RM100,000 for medical treatment. He and his family had to use some of their hard-earned savings, which was meant to be used for later years. It was gone in a blink of an eye!”

While Eng accepts that uncertainties in life cannot be controlled, “It can happen to anyone at any age”, she believes one can take precautions.

“It is not about how much you saved because what you have saved may just disappear overnight when something unexpected happens. And when it does, I do not want my savings to be affected. I want to be sure that my retirement fund will last my lifetime.”

The “AXA Retirement Scope 2010” is a global study conducted across 26 countries around the world. This bi-annual survey by AXA Group aspires to educate and gain insight into consumers’ views of retirement. AXA is represented by AXA AFFIN Life Insurance in Malaysia.

Malaysia Islamic Insurance

KUALA LUMPUR (October 25, 2010) : Malaysia's Islamic insurance industry will surpass its conventional counterpart in 10 years with the entry of new players but it needs more assets to expand further, an Islamic insurer said. The Islamic insurance market has expanded due to more interest in Sharia-compliant investments, and the issuance of four new family takaful licences in September would further drive growth, HSBC Amanah Takaful Malaysia said.

"The takaful industry always outpaced the conventional growth," HSBC Amanah Takaful Malaysia chief executive Zainudin Ishak said in an interview.

He added that takaful's penetration rate, defined as insurance premiums as a ratio of gross domestic product, will overtake that of the conventional market in a decade.

"The conventional industry will have its market because their channels are everywhere. Takaful's tentacles are still small that's why we need the four new players," Zainudin added.

But Zainudin said a challenge in growing the business was to ensure the continued expansion of the Islamic banking and capital markets, which would ensure a sufficient supply of instruments that insurers can invest in,

The Malaysian takaful industry witnessed a growth spurt after the central bank issued licences in 2006 to four consortiums, including HSBC, Malaysia's Hong Leong Bank and Prudential Holdings.

Islamic insurance has a penetration rate of less than 10 percent in Malaysia. The overall insurance industry's penetration rate is 43 percent, according to industry estimates.

Takaful assets accounted for about 8 percent of the insurance industry's assets, below Sharia banking's 20 percent share of the Malaysian banking sector, industry data showed.

Malaysia has eight takaful operators, including CIMB Aviva Takaful, Syarikat Takaful Malaysia Bhd and Prudential BSN Takaful Bhd. Last month, the central bank awarded family takaful licenses to American International Assurance Berhad and Alliance Bank Malaysia Berhad; AMMB Holdings Berhad and Friends Provident Group (UK); ING Management Holdings (Malaysia) Sdn Bhd, Public Bank Berhad and Public Islamic Bank Berhad; and Great Eastern Life Assurance Company Limited and Koperasi Angkatan Tentera Malaysia Berhad.

"If we grow takaful and I have funds to invest but sukuk are not available, then I can't invest," he said. "If you really want to have a quantum leap growth, then a broad strategy for these three industries is needed."

Takaful companies can only invest in assets that comply with Islamic law, ruling out investments involving excessive speculation, gambling, pork and alcohol.

An illiquid sukuk market and a shortage of Islamic assets, especially long-term paper, have generated an over-reliance on regional equity and real estate markets, rendering the $14 billion takaful industry vulnerable to sudden shocks in those markets.

Islamic bond issues are regularly oversubscribed, as there is more demand than supply of sharia-compliant assets, and long term investors such as pension funds tend to hold them until maturity.

HSBC Insurance (Asia Pacific) Holdings Limited owns 49 percent of HSBC Amanah Takaful Malaysia. Jerneh Asia Berhad holds 31 percent and Malaysia's Employees Provident Fund has the remaining 20 percent.

Life Insurance - 20% Growth

PETALING JAYA: The Life Insurance Association of Malaysia (LIAM) projects the insurance industry will grow by more than 20% this year and also expects a stronger performance by the insurance industry in 2011.

In a statement, LIAM said the projection for 2011 was in view of the numerous initiatives by the Government to propel the country into a high-income nation by the year 2020.

It pointed out that the life insurance industry performed very well in the first half of this year as new business sales grew by 24% on weighted premium basis, adding that the growth was contributed by a very strong performance in single premium sales that went up by 51% and, to a large extent, by regular premium sales that grew 22%, compared with the same period last year.
“Meanwhile the outlook for the second half continues to be promising. In fact, historically, the second half of the year normally contributes on average 55% to 60% of the full-year business,” it added.

It said the percentage of individuals with life insurance coverage, education and retirement savings, medical and health protection etc currently was still at a low of 41% of the population.

“The percentage is even lower if the fact that there are individuals subscribing to more than one policy is taken into account,” it said.

Compared with many other developed countries, this level is inadequate as the remaining population of 59% doesn’t have any form of insurance protection. This is a cause for concern as the Government moves towards making Malaysia a high-income nation,” it said.

LIAM lauded the Government for earmaking the insurance industry as one of the key areas that would contribute to the nation’s economic growth as it provided perks and incentives aimed at promoting financial planning among Malaysians.

It noted that the insurance-related highlights that were tabled during the Economic Transformation Programme (ETP) Open Day on Sept 21 would propagate growth with the insurance penetration rate reaching 4% of gross domestic products (GDP) by 2020 and the number of policies per population hitting the 75% mark as compared with the current 41% level this year.

“With these new initiatives arising from the programme, we believe almost all aspects of life insurance will benefit immensely. The boost to the insurance industry will depend on how fast the ETP initiatives can kick in,” it said.

LIAM president Md Adnan Md Zain said what could spur tremendous growth would be the personal tax relief of RM6,000, which is now given for life insurance, medical, education and annuity.

“Another area would be the private pension scheme which was tabled in the breakout session of the ETP. How soon the initiatives for allowing EPF fund to be channelled out for private pension funds will also be a factor,” he added.

3 Policies But No Coverage

Ms Theresa Tan's policies with Prudential saw her dutifully forking out a total of $600 in insurance premiums every month.

She believed she had forked out about $77,000 for them over the years. But when it came to coverage, the mother of three, 42, thought wrong.

She was diagnosed with early stage breast cancer, or stage 0, in June.

That same month, she went through a 12-hour operation at Gleneagles Hospital to remove her right breast and to have reconstructive surgery done, using skin and fat from her stomach. The operation and hospitalisation cost $30,000 and was covered by another insurance policy she had with Aviva.

Ms Tan then tried submitting her claim to Prudential this month for loss or potential loss of income. She thought she could claim up to $100,000 for one policy and up to $107,000 for another policy.

But her claims were rejected by Prudential, which explained to her in a letter that her condition was non-invasive and "does not fulfil the definition of cancer". Ms Tan's condition is known as ductal carcinoma in situ (DCIS) in her right breast.

This is a condition where the cancer starts in the milk ducts of the breast. It was considered non-invasive at that stage as the cancer had not spread beyond the milk ducts into the surrounding breast tissue. In Ms Tan's case, she had a mastectomy because the cancer cells were located in various parts of her breast.

Prudential's decision has surprised Ms Tan, especially since her family's medical history was known to her insurance agents. Her mother was diagnosed with breast cancer when she was 19 years old. She subsequently died in 2003 after a long battle against cancer.

Her mother's illness was what made Ms Tan buy her first insurance policy when she was 22.
Said Ms Tan, who is the co-partner of nanzinc.com, an online portal set up with her friend, entrepreneur Nanz Chong-Komo: "Fortunately, my mum had a pension plan so her treatment was covered.

"But seeing what she went through and given I was not under pension, I wanted to make sure that I was provided for. "I thought by buying three policies I was covering myself in every circumstance, but it didn't work out that way."

She claimed the gaps in her policy - it did not cover early stage cancer - was not explained to her by her insurance agents. Neither was the option of a rider to supplement her existing policies offered.

"What does this term mean?"
Did she think she should have read the fine print in her policy documents? She said: "Even if I had read the fine print, I don't think I would have understood what DCIS meant as a layman."

Ms Tan, who set up a blog - A Clean Breast of It - about her battle with breast cancer, said she later found out that most insurers do not pay out for non-invasive, early stage cancers.

Critical illness coverage typically covers the loss of income that comes from up to 30 critical diseases. These include major cancers, heart attack, coronary artery bypass, stroke and kidney failure. Fortunately, Ms Tan, who is on three months' medical leave since her operation, has not suffered loss of income as she is still being paid.

Apart from the online portal, Ms Tan also runs a writing agency, earning on average $5,500 per month. But she said: "It does limit my options. I can't continue to keep being paid if I'm not working. What happens if I still don't feel well after three months? Or if I need to take a six-month break to rest?"

Currently, she suffers from stomach cramps and can barely sit up for two hours at a go, she said. Ms Tan said: "I hope telling my story will create more awareness. I tell my friends to check their coverage and to make sure they are covered in full."

What she wishes is for the insurance industry to broaden its definition of critical illness to include non-invasive and early stage cancers. Or to at least make it compulsory to offer to customers other options which cover the gaps in any policy, she said.

Ms Tan lives in the east with her husband, 43, a civil servant, their son, 11, two daughters, four and nine, and her parents-in-law, both retirees in their 70s.

A spokesman for Prudential Singapore said Ms Tan's policies "unfortunately do not qualify for stage 0 cancer." She said coverage of early stage cancers depend on the kind of policy purchased and the definition of cancer in that particular policy.

She said: "Standard critical illness (CI) policies typically do not cover stage 0 cancer... It is important to know that each and every critical illness stated in the CI policy is precisely defined.
"They are based on standard definitions given by the Life Insurance Association (LIA). Unless the person's disease or surgery has fully satisfied the definition in the policy, no claim is payable."

But the spokesman pointed out that Prudential has policies like PruSmart Lady, which provide coverage for female-related illnesses that are non-critical in nature such as DCIS.

Policy booklet
She added that all information pertaining to a specific policy is provided in the policy booklet given to customers.

Dr Wong Seng Weng, 40, consultant oncologist at The Cancer Centre, drew a distinction between cancers where the person's longevity is compromised versus conditions which are treatable.

He said: "DCIS, if diagnosed and treated early, usually the survival rate is 100 per cent. Usually life insurers pay out when a person's longevity is compromised." But this doesn't mean that the cancer has to be very advanced, before a claim can be made, he clarified. Even if the cancer is at stage 1, the insurer can pay out if it is an invasive form that spreads, he said.

Ms Tan is grateful she caught her cancer early. She said: "I'm thankful I caught it earlier so I didn't need to go through chemotherapy and radiation. "But I believe cancer is cancer, whether in the early or late stages."

WHY do the bulk of standard critical illness policies not include non-invasive cancer?
MsPauline Lim, executive director of Life Insurance Association (LIA), explained: "Carcinoma in situ is specifically excluded from cover as these cancers can be treated and is not viewed as a 'critical' condition."

She said: "Insurers base their premiums on the extent of coverage. "There is a much higher incidence of the less serious cancers, so if they are also covered, it means premiums will cost much more and become less affordable for most ordinary people.

"This is not beneficial from a public policy perspective. LIA reviews its standard CI definitions from time to time."

The LIA standardises the definitions of critical illnesses.
Ms Lim said consumers should look out for the following:

•The scope of coverage and the circumstances under which policy will pay out.

•Whether the amount of critical illness (CI) payout is sufficient.

•If the CI premiums are fixed or if they increase as the policy holder gets older.

•If there are exclusions for any of the CI conditions
Recent policies

Recent policies in the market do offer early stage coverage or multiple critical illness coverage.
These typically cost more than policies based on LIA's standard definitions, said the spokesman.

One such policy is Great Eastern's Early-Payout Critical Care (EPCC), which provides payouts at earlier stages of critical illness. Its Great Eastern PinkLife plan pays out 25 per cent of the sum assured for carcinoma in situ, for cancers in the female organs.

Source: The New Paper.

Life Insurance Agent (Jakarta)

Life and health insurance policies are considered an investment in peace of mind, but not for insurance agents, some of whom consider selling insurance a nerve-racking job.

Dewi quit selling insurance in 2008 after two years because, according to her, the income was not worth the pressure.“The pressure is high because there are so many targets to meet. Either you become stressed out and quit, or you cheat,” the 53-year-old said.

For example, she added, some agents jacked up their own positions with help of their superiors. “This of course will eventually benefit the superiors,” she said, adding that some senior agents even credited junior agents for acquiring new clients, but took the commissions for themselves.

“An agents manager could earn up to Rp 100 million a month, while a junior agent only earns around Rp 1 million to 2 million,” she said. Similar to a multi-level marketing system, her former company used a layered hierarchy where senior agents received double compensation for doubling the pressure they placed on subordinate agents, she added.

Those who survive have to be persistent and sly because the shady business encourages an inhumane rivalry among agents and sales mangers, Dewi said. “There is one top agent in Lampung who views everyone as a potential client. She pitches her children’s teachers, and even leaves her children in the car during sales presentations, sometimes until 10 p.m.,” she said.

Dewi is now wary, and says she would not venture into a similar business again. “Nowadays, many Jakartans realize they need some form of health or life insurance. More and more people are looking for insurance.

“In this respect, being an agent is actually a good business,” she said, adding, however, that monthly insurance premiums are considerably high. “Very few people can afford to pay the monthly premium. That is why agents are constantly hunting for new clients,” she said.

According to Dewi, the cheapest monthly policy costs around Rp 600,000 at her former insurance company. “Many agents attempt to build their fortunes by first pursuing family members and friends, but they run out of client prospects by the end of the first year,” she said.

Many insurance firms offer alluring benefits for agents. “There are incentives such as free trips to Moscow and Beijing, or laptops for top agents,” she said. “They also provide training on methods of approaching people and convincing them to buy insurance, but it’s like a brainwashing session held every Monday morning,” Dewi said.

The training actually provides useful marketing instruction, she said, but added that some of the training is not free. “We were even required to pay for our agent licenses,” she said.

Another agent, who also works as a financial adviser for a life insurance subsidiary of a major Indonesian bank, said she earns around Rp 5 million a month, but never really knew where the firm’s profits went.

“It’s like a cash cow. I know the company profits from the hard work me and the other agents put in,” said the agent who refused to have her name published. “A financial adviser like me is under twice the pressure, answering to an assistant “up-line” sales manager and the bank’s branch manager,” she said.

A financial adviser is different from an insurance agent, she said. “An insurance agent only sells policies. They only hunt for new sales. A financial adviser also sells insurance policies and gathers clients, but is required to deal with claims and other administrative tasks related to client relations,” she said.

“At first I didn’t know what a financial adviser was or how to sell life insurance. The company put us in a one-month class to learn quickly about insurance marketing,” she said.

There were initially 50 people in her class, all of whom graduated, she said. However, only 15 have survived while the rest buckled under the pressure, she added.

There are at least five large insurance companies presently operating in Jakarta. (ipa)

Malaysia Takaful Insurance

PETALING JAYA: The local takaful industry needs more trained human capital and professional agents who understand the industry to increase the low penetration rates experienced in Malaysia, say industry players.

With the award of four new family takaful licences on September 1 by regulator Bank Negara Malaysia, the war for talent is bound to intensify as the new takaful players poach from existing takaful operators. The current takaful penetration rate in the country is 8%.

“A present challenge for takaful operators is the lack of skilled and knowledgeable human resource in technical areas such as product development, actuary and investment.

“These are very technical areas and require people with in depth knowledge of both the insurance and syariah-compliance takaful concept. A lack of such expertise prevents takaful operators from having a better understanding of the market and coming up with more innovative products to fit the needs of different target audiences,” said Etiqa Takaful Bhd chief executive officer Shahril Azuar Jimin.

Syarikat Takaful Malaysia Bhd group managing director Datuk Mohamed Hassan Mohd Kamil said that a shortage of talented staff in the industry had led to staff pinching, resulting in higher wages but no difference in productivity and efficiency.

Takaful Ikhlas Sdn Bhd president and chief executive officer Datuk Syed Moheeb Syed Kamarulzaman said takaful operators need to have insurance knowledge as well as syariah understanding.

“They also need to have staff experienced in takaful statutory reporting and accounting. The new companies have the insurance knowledge but may lack in shariah understanding and operational experience. Staff-pinching would provide them immediate relief and would cause problems for old players who have invested much time and money training staff,” he said. However, he added that it might not be easy to pinch agents as there were rules governing agency registration and movements.

The new takaful licences were awarded to joint-ventures between AMMB Holdings Bhd and UK’s Friends Provident Group plc; Public Bank Bhd, Public Islamic Bank Bhd and ING Management Holdings (Malaysia) Sdn Bhd; The Great Eastern Life Assurance Co Ltd and Koperasi Angkatan Tentera Malaysia Bhd; American International Assurance Bhd and Alliance Bank Malaysia Bhd.

Prior to the recent award, there were eight existing takaful operators - CIMB Aviva Takaful Bhd, Etiqa Takaful, Hong Leong Tokio Marine Takaful Bhd, HSBC Amanah Takaful (M) Sdn Bhd, MAA Takaful Bhd, Prudential BSN Takaful Bhd, Syarikat Takaful Malaysia and Takaful Ikhlas.

Syed Moheeb said that the primary takaful market was the Muslim segment and the penetration was low due to affordability, lack of appreciation for wealth planning, lack of shariah compliant insurance products and awareness of such products. “Education is vital but takaful operators have not invested enough in educating the primary market due to lack of funding. These programmes need to be structured and sustained over a long period. Perhaps there could be government funding or incentive for this,” he said.

Shahril said public education on the importance of takaful adoption would help increase awareness and penetration of these products.

“The concept of takaful needs to be visible so that people will see it as a way of life, either through creative campaigns and promotions or through a larger agency and distribution force,” he said.

Mohamed Hassan said that new players could now help penetrate untapped markets since the conventional agents were not allowed to sell takaful products previously by their principal companies. “Now that these companies have been awarded takaful licences, the agents are able to tapped this new market aggressively,” he added.

However, the new players might not be able to deploy their existing know-how and products immediately despite the players being backed by large conventional insurers, said Syed Moheeb.

“Takaful is different and to transact takaful, the new companies require a learning curve - they need to understand the fundamentals of Islamic financial transaction and embed the principles in their products and operations,” he added.

The current takaful operators did agree that new blood in the industry will not only help with product innovation but also increase the sales distribution channels and market reach.

Bancassurance Gains Ground

More consumers opting for No. 2 distribution channel in insurance industry, agency still leading

Bancassurance is fast becoming a formidable No. 2 distribution channel in the insurance industry behind agency.

Agency as a whole is still the main distribution channel but industry observers generally agree bancassurance is beginning to gain headway as more consumers are turning to this channel judging from the growing demand for bancassurance products.

Two reasons for this are the selling of simple insurance products by banks with their large branch network and depositors opting for single premium (SP) products amid the low interest rates.

An industry player who requested anonymity said there was definitely a growing competition between agency and bancassurance.

“The quality of some agents needs to be further improved. There are dedicated agents but there are also some who ‘product push’. Customers also seem to be more confident of banks due to their strong financial standing and stability.


“Agency will still maintain its position as a leading distribution channel but over time bancassurance may overtake agency as the top channel,” he added.

Statistics compiled by the Life Insurance Association of Malaysia showed that in terms of market share in the distribution channels last year, bancassurance commanded 31.9% compared with 27.6% in 2008. Agency was at 67.1% in 2009 and 70% in 2008.

It also showed that bancassurance continued to be a major source of SP in terms of new business for the first six months of this year with 66% of total SP business derived from this channel.

Last year, in terms of weighted premium market share in the distribution channels, bancassurance commanded 14.3% compared with 14.5% in 2008. Agency achieved 85.7% in 2009 and 85.5% in 2008.

The scenario was different for regular premium (RP) new business. Bancassurance only contributed 12% of total new business in 2009 but this was higher than 8% in 2008.

CIMB Aviva Assurance Bhd marketing director Angela Christine Tan, while acknowledging competition between the two channels, said other reasons for the rapid growth of bancassurance were wider Internet usage and social networking among the younger generation as well as easy access to information.

“The younger generation has a wider communication platform nowadays via Internet and social networking and the traditional method of having personal service from an agent may not be the deciding factor when it comes to purchasing an insurance product.

“Easily accessible information also allows consumers to compare products offered by different companies. Bancassurance products are basically more affordable due to the pricing structure,” she noted.

She added that the company registered positive growth over the last 12 months for new business contribution from its bancassurance and bancatakaful operations and anticipated double-digit growth by year-end.

Tan viewed the channels as reaching out to different target groups. Agency was the preferred channel for those who preferred a face-to-face and personalised service, she said, adding that these people were usually from the middle- to high-income bracket.

Bancassurance customers were typically those who preferred having their financial needs catered for under one roof, she said, adding that this group would generally be the lower- to middle-income earners who favoured affordable products with the same level of coverage as those offered by the agents.

Meanwhile, Uni.Asia Life Assurance Bhd CEO Ooi Say Teng said the company’s bancassurance business registered a growth of 69% while agency grew by 45% for the financial year ended March 31.

He said the strong business relationship with bank partners and the ability to understand and work based on the banks’ specific needs also contributed to the growth of bancassurance.

He added that the company saw bancassurance and agency growing side by side in terms of RP new business, noting that their existence complemented rather than competed with each other.

The current low penetration rate of 41% had created the avenue for effective use of multiple distribution channels which many life insurers had decided to get into, he said.

Islamic Finance

Just as conventional finance, Islamic finance has been vulnerable to fits and starts, to severe and disquieting hiccups whenever sound economic rules are being ignored. Last year showed how intertwined its future and health is with what happens to the global economy, and for that reason, the performance of an economy will significantly affect the growth of Islamic finance, says CIMB Islamic CEO Badlisyah Abdul Ghani. He considers the Islamic finance industry lucky not to have been involved in subprime credit and not to have been heavily engaged in highly leveraged activities.

As Badlisyah recalls, Islamic borrowers faced difficulties in paying their dues in 2009, in view of the constrained economic conditions and the sharp fall in the price of oil. Liquidity dried up for most of the year in the face of global uncertainty and a slew of companies failed to raise much needed capital to fund expansion activities.

One reason why Islamic banks were not as affected as conventional Western banks, argues Badlisyah, is that they were not sophisticated enough to participate in derivatives and other leveraged transactions. “The situation could have been much worse if the Islamic banks had been as sophisticated in employing leverage as their conventional banks’ counterparts were in the previous years.”

Could a subprime crisis – in the manner seen in conventional banking in the US – happen in Islamic banking in the near future? That remains to be seen, says Badlisyah, who comments on the crisis that overcame Dubai last year when the emirate found itself sunk in a debt hole, out of which it could not afford to bail itself.

To a certain degree, he believes, the media unfairly connected the Dubai crisis to Islamic finance, when in fact what the crisis did was to equally affect the conventional. “A credit transaction is a credit transaction and we should not look at Islamic finance from a credit perspective any differently from how we see conventional finance.”

As in conventional finance, he says, Islamic finance relies on the creditworthiness of an issuer or a client to decide where liquidity is channelled and directed. “Whatever structure is in place – whether it is Islamic or conventional – credit is still credit and it needs to be paid.”

Badlisyah contends that whichever financial or fiscal problems that the GCC countries have been facing of late do not have a significant bearing on the stability of Islamic finance in this part of the world.

Considering the clear restrictions placed on the use of derivatives on Islamic transactions, Badlisyah does not believe that the ability of Islamic banks to manage their risk has been constrained or compromised.

“For many years, we have had in Malaysia an effective Islamic derivatives market. There is no point in engaging in a business when you cannot manage your risk effectively. This is why we have the equivalent of interest rate swaps and cross-currency swaps. The only thing that is not allowed are credit default swaps.”

Balanced regulations with teeth
Badlisyah argues that everything that exists in Western capital markets that is of genuine value to banks and corporates has already been incorporated in Malaysia under the Islamic derivatives regime. This, he argues, is the reason why Malaysian Islamic banks have been successful in managing the volatility and fluctuations that have buffeted the industry in recent years. The ban on credit default swaps is completely justified, he feels, and will likely be for keeps.

The existing regulatory and legal framework for the industry in markets outside Malaysia – where Islamic finance is still growing – is unfortunately still unclear or has not yet evolved to their full form, which according to Badlisyah explains why strong, negative reactions immediately arise when derivatives are mentioned. He admits that the question remains whether the Islamic regulatory framework is evolving as it should, in tandem with the rapid development of the industry in terms of scale and complexity.

Interviews conducted by The Asset in recent months with different Islamic banks in Malaysia suggest that the regulations need more teeth to ensure that abuses are immediately detected and corrected and that Islamic banks continue to be transparent in the way they conduct their business. The problem is exacerbated by the dearth of talent as the industry expands. Would the drive of Western regulators to impose stricter market discipline and more transparency affect the

Malaysian establishment?
Badlisyah does not believe that it is a question of bringing in more regulations to ensure that the industry avoids the trauma of Western finance, although he guesses that more regulations would not be necessarily bad for the market. “It is, as always, about injecting a balance to everything we do. The rules ought not necessarily to restrain. Rather they should help enhance the market, while protecting consumers. It is a classic dilemma that every regulator faces. Rules are being examined, and the thought process is concentrating on what exactly rules need to do.” Regulators, he adds, have learnt a great deal from the Asian financial crisis of 1997-1998 and the other global shocks that have happened since then.

From Badlisyah’s point of view, that Malaysian Islamic banks emerged from the global financial crisis relatively stable and unscathed is due to the regulatory framework that was put in place. “Malaysian banks found themselves totally isolated from the crisis because they had not been allowed to invest as much overseas after the Asian financial crisis.”

Catering to different flavours
We must not kid ourselves. The market will change itself as a result of the global financial crisis, there will be a different regulatory framework that will be introduced in the market, not intended to weaken the market but to enhance it both for the major industry players and the consumers. Yet, once again, there will be a lot of fear and anticipation about how business will be affected while people are sorting out what the new regulatory framework will look like.”

It is natural to expect that even worse forms of irrationality could come back into global markets. “It is always good to be on the safe side and have built the necessary regulations that avoid the irrational exuberance that characterized most markets. In Malaysia, our Islamic banking business and market is fully regulated by two regulatory bodies. We have Islamic product development guidelines issued by the central banks some time ago, as well as a host of products that have been approved by the central bank of Malaysia. These are usable by players in other jurisdictions.”

Badlisyah says the standardization of Islamic banking products was facilitated by the guidelines that allow for all Shariah interpretations and applications. “In other words, I can have a full financing product with essentially a structure based on the Hambali school of law and Shariah to cater to my customer segment that follows the Hambali school of law and I can have another structure for both financing that caters to the Hanaffi school of law. But I still account for it as a home financing programme. One key is to support the government initiative for financial inclusion.”

Badlisyah says Shariah banking is all about financial inclusion and that is the reason why there are different Shariah schools of thoughts to facilitate and enhance the ability to have an inclusive financial market. This explains why the focus in Malaysia, is not so much about what structure or product one is going to deliver into the market . “Our thinking is more of what else can we do, how else can we enhance financial inclusion to make sure that everyone’s financial needs are met.”

Not worried about cannibalization
Does this bring Islamic finance on an irreversible path, a different crux in the road from that which conventional finance has trodden? “It depends,” explains Badlisyah.

“If you are a large financial group in Malaysia like CIMB, then it is still a predominantly conventional financial group that has Islamic banking operations. It depends how you structure the business. We exist as a financial service provider to meet the needs of our clients. We appreciate that client needs can be in conventional banking or in Islamic banking and it is our responsibility to meet those needs. Our priority is to make sure that we provide them with a choice. We provide them with value and recommend the best value. We offer a dual banking leverage model where we leverage the same results and infrastructure to do Islamic banking.

"Considering the extra attention devoted to Islamic finance, is there a fear that the conventional business may be cannibalized? Badlisyah says cannibalization only exists when conventional bankers are of the view that Islamic banking is not their business.

“For a corporate banker providing corporate loans to customers,” Badlisyah points out, “the key performance indicator (KPI) is to sell both conventional and Islamic loans. When a customer chooses Islamic, we are still focussed on the growth of assets. Granted, there is the natural trend of customers increasingly demanding Islamic products, but this does not arise from a fear that conventional finance is weakening. In fact, we have yet to see the peculiar trend of conventional funds moving to Islamic banks or deposits. It is certainly not happening in Malaysia since conventional and Islamic banking are both stable and provide enough for the needs of their customers. In other words, we are not worried about cannibalization.”

Customers opt for value
The debt market in Malaysia is now 60% Islamic and in the stock exchange 80% of the stocks are Shariah compliant or are being managed in a Shariah compliant manner thus attracting wider investor base. The takaful sector in Malaysia is still relatively small compared to conventional insurance. “It is roughly just about 7%. But if you really scrutinize the specific business lines, for life for example, it is about 20%.”

Badlisyah feels it is crucial to communicate to the customer the value that each product offers. “We came up with a product with a fixed-investment account and it is the only Islamic investment account in the country where return is fixed and given upfront. It is a three-month deposit and the return is given on day one. The conventional market did not have that kind of product and we took the market by storm when it was launched. Eventually, a competing conventional bank replicated the product in the conventional market. It shows that Islamic finance can lead in innovation to meet customer needs.”

“The most important thing I have realized as an Islamic banker,” confides Badlisyah, “is the paramount importance of providing high-quality service to customers.

There will be countless themes and variations of products across all markets, so what matters is how you differentiate yourself in terms of delivering the products in the most efficient and effective manner. At the end of the day, what matters to people is the value proposition you offer. If something is good and gives a better return, people will go for it. So if conventional finance can deliver the value, then there will be more customers going there.”

Still, there are those who do not have any appetite for the conventional at all. There is a substantial segment within the market – the true blue Islamic finance users – that will never use or want to touch conventional finance. “This is the reason why CIMB decided to have both.”


How does he rate CIMB’s success in attracting a non-Malay and non-Islamic constituency to opt for Islamic finance? “I am glad to say that we have been rather successful in attracting all types of customers, including non-Muslims and non-Malays,” Badlisyah says. “Our current customers constitute a good balance between Muslims and non-Muslims.”