LONDON, 6 June 2005 — There remains a “tremendous potential” for both conventional and Islamic insurance (Takaful) in Malaysia. So says Dr. Zeti Akhtar Aziz, the director general of Takaful & Insurance, who also concurrently serves as the governor of Bank Negara, the Malaysian central bank.
Malaysia in fact celebrated the 20th anniversary of its Takaful industry in November 2004. There are currently four Takaful operators in Malaysia — Takaful Malaysia, Takaful Nasional, Mayban Takaful and Takaful Ikhlas — with a total Takaful Fund Assets of 5,028.6 million Malaysian ringgit (RM) at end 2004, but with a total net contribution income of only RM1,123 million. A fifth Takaful license to Commerce Asset Berhad Group has been approved, although no such license has been approved for foreign Takaful companies, unlike Islamic banking licenses.
In the Gulf Cooperation Council (GCC) countries insurance has been a late developer with market penetration and income contribution per capita ratios very low indeed. In Saudi Arabia, for instance, compulsory motor car insurance was only introduced in November 2003. Since then compulsory medical insurance for expatriates has been introduced with the possibility of extending this to Saudi nationals in future. Similarly, pensions, life and general insurance are also in nascent stages, which leaves huge potential for market growth. Not surprisingly, a spate of new insurance and Takaful companies have been licensed in recent months in the Kingdom. In terms of Islamic insurance, Bank Al-Jazira’s Takaful Ta’awuni is a pioneering market leader, especially for its Family Takaful suite of products.
In Malaysia, Dr Zeti in the country’s 2004 Takaful Annual Report, acknowledged that the industry continued to face an increasingly challenging environment during the year because of the “forces of globalization, technological advancements, innovative distribution channels and continuing convergence of financial activities.” The Takaful industry has also come under increased competition from conventional insurance. Despite all this the Takaful industry in Malaysia sustained its growth in 2004 at 10.8 percent and 13.5 percent in terms of aggregate contribution income and Takaful fund assets respectively. However, the underlying growth rate for the last few years has been mixed suggesting that Takaful’s penetration of the Malaysian insurance market has been an uphill struggle.
Bank Negara has introduced a number of policy initiatives during 2004 which it hopes will help toward building capacity and financial soundness of the Takaful operators.
Perhaps, the most important grounds for optimism for the future development of the Malaysian and regional Takaful industry is the recent introduction of regulations making it mandatory to have Takaful cover for all Islamic financing in Malaysia. In fact, it has been one of the major anomalies in Islamic banking that its products were never complemented by Islamic insurance cover. Perhaps, the Malaysian initiative will yet again set an important trend for others to adopt in the global industry.
The Takaful coverage in fact forms part of the financing package. For instance, if a bank offers Islamic mortgages, then it has to warp the product with compulsory mortgage Takaful, which can be offered by the bank or in cooperation with a Takaful operator.
This single initiative is a major development which other countries should emulate, especially to spur on their respective Islamic banking and insurance markets. In many of the GCC countries, Islamic mortgages do not have a compulsory Islamic insurance wrap. In fact, in many markets including the UK, US, the Middle East and South Asia, where Islamic mortgages are offered, these are usually combined with conventional building and contents insurance. In some markets Takaful of course may not be available.
Bank Negara predicts that greater use of bancatakaful, which leverage the extensive branch networks of the banks, would further extend the reach of the Takaful market and promote better product bundling.
Bank Negara is also confident that new minimum capital requirements for Takaful companies of RM100 million, once implemented during 2005, would improve the underwriting capacity of these companies, which in turn would precipitate more product launches and therefore more business.
Family Takaful business in Malaysia continued to grow in 2004, with new business contributions up 18.1 percent to RM603.7 million, while sums participated rose sharply by 98.9 percent to reach RM36.5 billion. The reasons for this include the growth in group ordinary family Takaful plans; growth in demand for invest-linked Takaful plans; and higher demand for endowment Takaful.
General Takaful business (marine, aviation, motor, and fire) in Malaysia, similarly, continued to grow in 2004, with total gross contributions up 22.2 percent to RM492.5 million.
The reasons for this include the growth of the marine, aviation and transit sector following a large co-Takaful share secured by a Takaful operator on a large risk aviation account; continued growth of motor insurance driven by demand in comprehensive cover. The fire and motor sectors continued to dominate the portfolio of general Takaful business in Malaysia in 2004 with 38 percent and 31 percent of the total gross contributions respectively.