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Malaysia: Consolidation expected in growing takaful sector

Source: Middle East Insurance Review | Feb 2017

Attractive growth prospects for the takaful market in Malaysia and regulatory pressures will drive sector consolidation in the short term, said Fitch Ratings in its report “Malaysia Takaful Dashboard 2017”.
 
   Recent regulatory developments – aiming to enhance the sector’s global competitiveness and further align Malaysia’s insurers with global peers – will help to boost M&A activity. “We expect small-scale operators which are unable to justify the additional capital burden or start-up costs on the splitting of their composite licences to be most likely to engage in M&A activities,” said the rating agency. 
 
   Malaysia’s takaful sector continues to enjoy higher growth than the conventional sector, driven by a low base, stable domestic consumption and increasing consumer awareness. In 1H16, family takaful and general takaful grew by 9.8% and 5.8%, respectively, compared with the 8.2% in conventional life and 2.6% in general insurance. 
 
   Family takaful represents almost two thirds of the country’s takaful segment and represented 30% of the overall life market based on new business premiums in 1H16, up from 29.7% at end-2015. General takaful accounts for 12% of the overall general insurance market in the same period, up from 11.6% at end-2015. 
 
   Growth factors for the takaful market include government-driven initiatives to improve the regulatory framework and boost the sector’s attractiveness, said the report. The extension of tax exemptions to foreign takaful operators for non-ringgit transactions till 2020 in the 2017 Budget is a recent example. Companies’ efforts to reach out to the rural areas to tap the growing middle class will also be a key growth driver.
 
   In addition, as takaful operators realign their strategic focus and gradually retain more risks, Fitch expects some bottom-line volatility in the short term. They will also have to optimise their approach towards delivering operating results on a risk-adjusted basis.
 
   There are currently 11 takaful operators in Malaysia, two of which are foreign-owned.
 
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