Malaysia Seeks Takaful Growth With New Regulations

Malaysia has laid out a regulatory framework aimed at building a foundation for the growth and development of takaful, or Islam-compliant insurance, as the country seeks to become a global takaful hub.

Bank Negara Malaysia, the country's central bank and regulator, is considering an introduction of risk-based capital requirements for takaful operators and has published a draft paper on the topic. It has also issued new guidelines for valuation of liabilities, financial reporting and operational frameworks.

The new guidelines and framework are designed to ensure that Malaysia's takaful operators establish strong governing principles and that risks from business activities are properly identified and managed, said Brandon Bruce, senior executive director of assurance at consultancy Ernst & Young.

The RBC framework draft for takaful "is more stringent than the existing one for conventional insurers," said Marcel Omar Papp, head of retakaful at Swiss Re in Malaysia. Hopefully, the final RBC framework will be amended in a way that there is a level playing between conventional insurers and takaful operators, he said.

Bank Negara is "in principle supporting the development of takaful in Malaysia as it wants the country to become a global hub for Islamic finance," noted Papp. However, he said some of the recent regulatory changes raise concern that the development may be hampered.

The draft paper introduces risk-based principles for managing capital so that takaful operators should remain financially resilient in response to their risk profiles. Bruce said Malaysia plays an important role in the global takaful market and is leading the sector in regulatory framework, financial reporting, capital adequacy requirements, product innovation and operational excellence.

Takaful regulation in Malaysia is "robust and advancing well, in tandem with market developments and consumer expectations," said Bruce.

There have been positive developments in several takaful markets such as Malaysia because of the introduction of takaful-specific regulation and minimum capital requirements, said A.M. Best Co. in a recent report (Best's News Service, July 12, 2011).

The opportunity to participate in new takaful regulation development, along with tax incentives, are proving an attraction for local and international operators, said Azli Munani, chief executive officer and executive secretary of the Malaysian Takaful Association.

Less than of 50% of Malaysia's population has an insurance or takaful plan, and that, along with "ready-made" talent in the field, are among the business drivers for the market, according to Munani.

Malaysia's takaful sector has seen growth of 20% to 25% per year in the past five years. The government has played a prominent role through market liberalization, building Islamic finance foundations and promoting business development across Malaysia, said Azim Mithani, CEO of Prudential BSN Takaful Bhd.

The government's promotion and regulatory efforts give insurers a good chance to develop, according to Nirmala Menon, CEO of ING Insurance Bhd. (Malaysia) and head of Southeast Asia.

In 2010, four new family takaful licenses were granted to joint ventures led by ING Groep NV, Great Eastern Life Assurance Co. Ltd., American International Assurance Bhd., and AMMB Holdings Bhd (Best's New Service, Sept. 2, 2010). Three foreign-owned operations including AIA AFG Takaful, Great Eastern Takaful and ING Public Takaful, have been launched in the past year.

The new operators have strong value propositions to enhance family takaful in Malaysia, particularly untapped businesses in micro-takaful, medical and retirement products, said Munani.

The four new licenses were issued "with a view to fast-tracking" family takaful penetration in Malaysia, given the operators' sizable existing conventional agency forces and established bancassurance networks, said Bruce.

With the new licenses, Malaysia's takaful penetration is expected to reach 18% by 2013. "This is seen as an important step forward for the industry," as total takaful penetration was only 11% as of September 2010, compared with about 54% overall for insurance and takaful together, noted Bruce.

The new takaful operators have regional or global insurance groups as joint venture partners, creating a positive effect on the market with new product ideas, services and systems, said Papp.

The arrival of new players has forced existing players "to beef up their game," said Papp. However, he added there is still potential for companies "to venture into new market segments and not to compete on existing business." The challenges on human resources will be increased as the takaful talent pool is rather small with a lot of turnover among companies.

In Malaysia, Munani said family takaful grew 28% annually over the past five years, representing 80% of the total takaful market. The takaful sector achieved 12.4% market share in terms of net contributions.

Top takaful players in Malaysia are the early-established local operators including Etiqa Takaful, Syarikat Takaful Malaysia and Takaful Ikhlas. However, Munani said the total market shares of these three operators has been reduced in recent years.

Malaysia has four family takaful operators, eight composite takaful insurers, four retakaful operators and one composite international takaful insurer. The country applies a combined takaful model in which segregation of funds between shareholders and policyholders is required.

Average return on equity for Malaysia's takaful operators was about 5% between 2006 and 2010. Bruce said the results appeared to be largely propped up by those of the two largest players, Syarikat Takaful and Etiqa Takaful, which recorded return on equity of about 10% to 11% on average over the past two years.

(By Iris Lai, Hong Kong bureau manager: [email protected])