Attractive growth prospects for the takaful market in Malaysia and regulatory pressures will drive sector consolidation in the short term, says Fitch Ratings.
Recent regulatory developments aim to enhance the sector’s global competitiveness and further align Malaysia’s insurers with global peers, says the international rating agency in its report, "Malaysia Takaful Dashboard 2017".
There are currently 11 takaful operators in Malaysia, two of which are foreign-owned.
Small-scale operators which cannot justify the additional capital burden or the costs related to the splitting of their composite licences are regarded to be most likely to engage in M&A activities.
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.
The takaful sector continues to enjoy higher growth than the conventional sector, driven by a low base, stable domestic consumption and increasing consumer awareness, says Fitch. Family takaful grew by 9.8% in 1H16 while general takaful grew by 5.8%. This compared to 8.2% growth in conventional life and 2.6% in general insurance.
Family takaful represents almost two-thirds of the country's takaful segment, and 30% of the overall life market based on new business premiums in 1H16. General takaful accounts for 12% of the overall general insurance market.
Growth factors for the takaful market include government-driven initiatives to improve the regulatory framework and boost the sector's attractiveness, says the report. The extension of tax exemptions to foreign takaful operators for non-ringgit transactions up to 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.
Life Insurance and Family Takaful (LIFE) Framework initiatives will afford greater flexibility to family takaful operators. The deregulation of operating costs and diversification of distribution channels will spur product innovation. At the same time, adequate safeguards are implemented to protect consumer interests, and maintain their confidence in the industry.
The deregulation of motor and fire tariffs presents risks and opportunities for general takaful operators, as they grapple with a new industry landscape, says Fitch.