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Malaysia’s insurance and takaful sector is expected to be steady next year, underpinned by low insurance penetration and stable economic growth. With a strong banking sector as a back-up, the GCC governments have introduced Bancatakaful scheme which proved to be the most efficient channel in distributing tailor-made Islamic insurance products like medical takaful, the most sought after sharia-compliant product in the region. The Malaysian Takaful Association has forecast that takaful contributions will increase to QR10.99 billion ($3.02 billion) in 2014 from QR8.88 billion ($2.44 billion) last year, on the back of a market penetration rate of 14%.
“The demand for investment-linked products will continue to drive growth in the life sector, as consumers’ risk appetites increase amid low interest rates, while higher private consumption will sustain growth in the general insurance sector’s personal line products.
“Growth potential in the takaful segment is likely to be high, despite new regulations, supported by a growing range of products and wider distribution coverage,” Fitch Ratings said in a statement yesterday.
Fitch said more merger and acquisitions (M&A) activities were likely to take place in the takaful sector, as operators with limited operating scale and weak financial flexibility struggled with the new risk-based capital requirements.
“The new regulatory capital treatment is likely to spur some takaful operators to seek alternative funding sources to boost their capital needs,” it said, adding that credit profiles of industry players would be supported by ongoing premium expansion, sound capital buffers and stable underwriting margins.
It expected motor insurers’ adverse losses in compulsory motor insurance to improve progressively, although breakeven was unlikely. As awareness of wealth protection, savings and security benefits of takaful increases, families will increasingly demand such products as they broaden their use of Islamic financial services products. Given the existing low insurance penetration levels among GCC Muslim populations, it is plausible that takaful growth will outstrip conventional insurance growth over the next few years in the takaful and insurance sector.
With the high potential of the internationalisation of takaful, the urgency to grow and push for regional champions within high growth and stable regions is greater than ever. This will allow the industry to leap to the next level to realise its global market potential and position it as a strong ethical-based alternative to conventional insurance. Competition, operational issues and dearth of qualified talent continue to impact the sector's growth in the region. Profitability of takaful firms has been threatened not just by undifferentiated strategies but also the lack of uniform regulations allowing them to operate across different models. Undifferentiated business strategies mean most operators are competing intensely and this is likely to squeeze out the under-performers. With strong competition from conventional incumbents, takaful operators are likely to continue their struggle in the medium term, although some will look at alternative customer segments and explore merger options.
"This is the right time for takaful operators to invest in research and talent development to bring in much-needed creativity within the ambit of sharia principles. Furthermore, customers and takaful operators have shared the responsibility for enhancing customer awareness, as in my experience, takaful is the least understood concept of Islamic finance and banking, says Adeel Mushtaq, Director (Assurance and Advisory) with KPMG.
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