Malaysia’s takaful sector continues to evolve as companies settle in to a new and holistic regulatory environment, setting the market truly apart from its other Islamic finance peers.
Malaysia’s family takaful market remains strong with new business contributions of MYR3.5 billion (US$1.2 billion) for full year 2012, marking an increase of 29.9% compared to same period in 2011. The family takaful segment accounts for two-thirds of takaful contributions in Malaysia.
The relatively smaller non-life segment grew 9.2% in 2012 to reach MYR1.75 billion in gross contributions.
The family business continues to encapsulate the achievement of the takaful sector in Malaysia. Family takaful currently accounts for 45% of total new life premiums in the country, and has been growing at a much faster rate than their conventional peers.
Group family business registered an on-year increment of 40% to reach MYR1.42 billion, while individual family business rose 65% to reach MYR1.95 billion.
Going forward, competition in the family segment will remain keen as the more established companies look to surge ahead amid a credible push for market share from some of the new entrants. What is certain is that regulations would play a big role in how companies move forward henceforth.
Islamic Financial Services Act to shape the industry
In its efforts to continually upgrade the regulatory framework for Islamic finance, Bank Negara Malaysia (BNM) has introduced its most comprehensive guideline to date – in the form of the Islamic Financial Services Act (IFSA).
Set to be implemented by the end of the year, the IFSA looks to promote end-to-end Shariah compliance amongst the various Islamic financial providers. It incorporates recent regulations such as the Takaful Operational Framework (TOF) as well as the Shariah Governance Framework (SGF) to create the most holistic prudential standard for Islamic institutions.
“It’s the right thing to do as the best way to appeal to the market is to have financial strength and stability,” said Mr Azim Mithani, CEO PruBSN Takaful.
“There will be differences in the product development process, advisory process, strength of the Shariah process; all these are bound to evolve,” he added.
On the whole, the industry is responding positively to the move, and while it does make it tougher for takaful companies, it helps put in place common standards by which the industry can be measured.
“These standards do not inhibit the creativity of the sector, what Bank Negara wants is a level playing field for takaful operators and to make them stronger in delivering their services,” said Mr Wan Azman Wan Mamat, CEO of AIA AFG Takaful.
End-to-end Shariah compliance
Other than financial stability, a key thrust of the IFSA is Shariah compliance and instances of non-compliance would need to be addressed by the regulator and the Shariah committee of the financial institution.
In such an instance, the Act requires the financial institution to immediately cease its business or activity, and submit a plan to rectify the non-compliance to the regulator within 30 days.
In the context of retakaful, the IFSA’s end-to-end Shariah compliance provides a boost for retakaful companies who have the explicit backing of regulators when it comes to ceding of takaful risk.
“The regulations compel takaful companies to do things the right way and offer the risk to us first rather than the conventional market,” said Mr Marcel Omar Papp, Head of Swiss Re Retakaful in assessing the positive effect on retakaful business.
But he also pointed out that retakaful players are also subjected to the same regulatory requirements as direct operators, which makes Malaysia a more stringent environment for retakaful players compared to anywhere else.
Nonetheless, the four Kuala Lumpur-based retakaful companies – Munich Re Retakaful, Swiss Re Retakaful, MNRB Retakaful and ACR Retakaful – have gotten somewhat of a leg up over their Labuan counterparts, as far as business opportunities are concerned. A separate note was recently issued by BNM whereby in the case of non-life risk, takaful companies are expected to firstly find a Kuala Lumpur-based retakaful firm to cede to, before going to Labuan-based offshore retakaful players or the international retakaful market.
This would go some way in managing the arbitrage enjoyed by Labuan-licensed firms who have had access to Malaysian business while operating under a more relaxed regulatory environment under the Labuan Financial Services Authority, which supervises operations at the Labuan International Business & Financial Centre (Labuan IBFC).
More M&As on the way?
Over the past year, the Malaysian takaful market has seen several M&As taking place, in part driven by the need for shareholders to re-strategise in light of regulatory demands. Aside from the recent developments with the IFSA, takaful companies in Malaysia have had a few years to digest the requirements of a risk-based capital framework for the industry, similar to that which is in place for the conventional sector.
The most recent M&A in January saw both Aviva and CIMB withdrawing and shrinking their stakes respectively in their joint-venture company, CIMB Aviva Takaful, which was subsequently bought over by Khazanah Nasional – the government’s investment holding arm – and Canada’s Sun Life Financial. And late last year, the absorption of ING Malaysia by AIA Group reduced the number of takaful operators to 11.
The wider consensus points to more M&A opportunities in the takaful sector, keeping in mind the requirement under the IFSA for companies to split their composite licences over the next five years. This would affect eight companies who hold composite takaful licences in the market.
“M&As will become a normal activity because companies who are already in the market will be re-thinking their strategy, and those from the outside will also look at and assess the opportunities to enter the market,” said Mr Ahmad Rizlan Azman, CEO of Etiqa Takaful.
“I think within the next five years, the family takaful sector will consolidate further. Companies will have to decide whether to split or surrender one of their licenses and I foresee half will surrender…leaving room for M&As,” said Dr Mohamed Rafick Khan, Deputy CEO for Munich Re Retakaful.
At present, composite companies are actively strengthening their capital and performing feasibility studies to assess their options in anticipation of the need to eventually split the licences.
Manpower needs key
But whether these companies choose to remain whole or split, the need for talent is an ever-present challenge confronting the industry.
“If you speak of specialists, the takaful sector is not quite there yet… and at senior management level you tend to see the same CEOs moving from one operator to the other. So if the licences were to be split up, we’ll need more people to join the takaful industry,” said MNRB Retakaful CEO Sahimy Man.
While Malaysia’s takaful sector has done well to attract non-Muslims, who make up close to 40% of the population, Mr Sahimy said the composition of takaful professionals and agents are heavily skewed towards Muslims and hence the sector would do well to not only encourage more non-Muslims customers but also practitioners.
Can takaful take advantage of Islamic financing boom?
The family takaful segment, which accounts for two thirds of total contributions, continues to present the biggest expansion opportunity for many takaful companies.
However, a confluence of economic and regulatory measures looks to present tangible opportunities for non-life takaful to grow further. At present, non-life takaful accounts for only 10% of total non-life premiums in the country.
Amongst the growth drivers for the non-life sector is the government’s Economic Transformation Programme (ETP) announced a few years ago which includes a slew of infrastructure projects, of which a significant part has and will continue to be financed through the Islamic route. And with the IFSA’s thrust of end-to-end Shariah compliance for Islamic institutions, Islamic banks, investors and brokers would be obligated to explore takaful options for the insurance needs of these projects as part of a complete Shariah-compliant supply chain.
Major retakaful operators such as Swiss Re and Munich Re evidently have the in-house expertise to write such large risks and provide support for the direct operators.
“Technical expertise is not an issue as direct companies will always seek help from retakaful. So collectively as an industry, I believe the takaful sector is able to write these risks,” said Munich Re’s Dr Rafick.
Nonetheless, Mr Papp is of the opinion that direct takaful operators have little incentive in the first place to write such risks, and also believes that at this stage, the terms offered to retakaful companies to write such large non-life risks are not very attractive.
“None of the takaful companies specialise in these large risks, and to underwrite these types of infrastructure projects you need to have specialised underwriting, risk management capabilities which is very different to build up. Compared to the likes of Chubb, ACE, AIG and Allianz, it’ll be very difficult for the local takaful operators to compete.
“Currently in this segment, it’s purely price-based and I don’t see a lot of emphasis on the Islamic-compliance side,” he added.
Ultimately, the spirit attached to the IFSA means there are opportunities for takaful operators to write the large risks coming off the back of Islamic financing deals. However, whether the sector wishes to fully tap into this segment looks questionable at the moment.
“We will consider where there’s an opportunity but it’s not something we focus on. A big chunk of our efforts in non-life are in motor and fire….and family business is still the priority,” said Mr Ahmad Rizlan Azman, CEO of Etiqa Takaful, which accounts for 50% of non-life takaful contributions in 2012.
He added that Etiqa will also do more to tap into the SME segment for various lines of businesses, leveraging on the synergies which its main shareholder Maybank has with existing corporate clients.
New opportunities going forward
Going forward, direct takaful operators are optimistic about growth prospects particularly in the family business. Many predict that savings and protection products will grow further given the expanding middle class urban segment in the country.
“As the government works towards a high-income economy and disposable incomes increase, a lot more savings products can be sold on the family side. As it is, Malaysian society is very concerned about savings,” said Mr Sahimy.
Retirement products is also an area of growth in the market, and the government’s move to encourage higher retirement savings through voluntary contributions to a Private Retirement Scheme with tax relief incentives sets a positive direction.
Aside from the bread and butter family takaful products, the industry is also working with relevant authorities to put in place a microinsurance programme for paddy farmers. With the assistance of Swiss Re in product design and pricing, the Malaysian Takaful Association (MTA) has so far developed an area-yield index cover for about 170,000 small-scale rice farmers. They are now in discussion with the relevant authorities on the product and pricing details.
Sustainable growth ahead
All in all, Malaysia’s takaful segment is ushering in a period of sustainable growth with well-capitalised companies adopting strong niches in both the life and non-life segments.
Ultimately, those not able to compete on their own may seek the M&A route in order to remain viable amid new regulatory demands. This would also pave the way for foreign entrants eyeing a slice of the Malaysian pie to enter the segment.
The life market will continue to see dynamic growth with some companies looking to improve their regular contribution business, as well as increase their presence in the corporate segment, especially amongst the SMEs. Distribution will also be an area of focus, with several companies still actively growing their agency force as well strengthening their bancassurance position.
With its adoption of market-leading practices, Malaysia’s takaful sector is almost at par with its longer-established conventional counterparts in most aspects of the business. The building blocks for a stable and dynamic sector are falling in place very quickly; what remains is for the companies to realise the full potential of the market.