Standard & Poor’s views the industry risk in the more established Malaysian takaful, or insurance, market as comparatively lower than in the Gulf Cooperation Council (GCC), due to the country’s more developed regulatory and legal environment. Growth potential for Islamic finance in Malaysia overall is still strong, particularly if it is to reach the level outlined in the Financial Sector Masterplan by Bank Negara Malaysia, the central bank of Malaysia.
The historical stability and profitability of the takaful market is attracting an increasing number of takaful operators to Malaysia. The market expectations of growth in gross contributions of about 15-20% per year are broadly in line with our expectations. At the same time, however, competitive pressures are likely to affect the Malaysian market earlier than the GCC takaful market, particularly in the general takaful segment. This may place pressure on pricing as companies begin to more aggressively compete for policyholders through a broader range of distribution channels.
In terms of credit ratings on the takaful sector, Standard & Poor’s applies the same analytical process to the traditional insurance market. Less than 45% of the Malaysian population have life or family takaful policies (these being long-term savings, investment, and/or protection plans) but this is relatively high when compared with statistics for the GCC. More significant is the proportion of life insurance penetration relative to non-life, which shows a higher level of development for the Malaysian market relative to the world average.
This is based on our view that in a wealthier and more insurance-aware market, life premiums outstrip non-life premiums per capita. Nevertheless, the relatively low level of total premiums per capita supports strong growth potential, with market expectations of growth of 20% a year being broadly in line with our expectations.
The more developed regulatory and legal framework for takaful in Malaysia compared to the GCC supports this potential for growth. The regulatory focus on the introduction of a risk-based capital framework promotes better risk management by takaful players. Also, the compulsory takaful sales agent qualification, as introduced by the Malaysian Takaful Association, is encouraging as it enhances product recognition and the advice available to consumers. The local regulator has also been supportive in raising consumer awareness about the need to insure (through consumer education programmes) and in encouraging bancassurance (the distribution of an insurance
company’s products via a bank’s branch network) and broader distribution channels to improve the availability and proximity of takaful to the consumer.
The broader Islamic capital markets in Malaysia allow for a greater depth of instruments to aid better risk management and asset-liability management. This ultimately improves product choice, particularly in the family takaful segment, where a broader range of products has gradually been rolled out. From the mainly mortgage-backed portfolio of family takaful products, investment-linked products have grown rapidly in line with a stronger marketing strategy, and will be further boosted by stronger stock market performance in 2006 and 2007.
In the general takaful segment, much of the 2006 growth was driven by the motor line of business. This was not just due to an increase in the compulsory motor segment, but also as a result of a greater volume of business written in comprehensive and third-party liability, reflecting an increased use of broader distribution channels (including banking institutions).
Other lines of business, in particular commercial, showed growth potential, although this may be constrained by a relatively limited availability of retakaful (the Islamic insurance equivalent of reinsurance, or
risk protection taken by takaful companies) capacity for large, specialised risks. Nevertheless, with new retakaful operators in Malaysia’s offshore financial centre of Labuan, a Malaysian island off the coast of Borneo, these concerns seem to be easing somewhat.