A Relook into Awareness, Perceptions, Barriers and Future Insurance needs: A Case Study of Takaful and the Malays

Transcription

1 Conference of the International Journal of Arts and Sciences 1(19): (2009) CD-ROM. ISSN: InternationalJournal.org A Relook into Awareness, Perceptions, Barriers and Future Insurance needs: A Case Study of Takaful and the Malays Yon Bahiah Wan Aris, Universiti Teknologi MARA,Malaysia Siti Zaleha Sahak, Universiti Teknologi MARA, Malaysia Norshahida Shaadan, Universiti Teknologi MARA, Malaysia Abstract: This paper attempts to explore to what extent Family takaful (Islamic life insurance) has been accepted by the Malay Muslims in Malaysia. Using a convenient sampling on 196 respondents in the Shah Alam area, questionnaires were personally distributed to examine their level of awareness, perceptions, barriers to purchasing takaful and their future takaful needs.the results revealed that although the Malays are aware of takaful, they are not convinced that it is what they need for financial planning. On future takaful needs, takaful operators may need to look for innovative products for protection, education and investment purposes. 1 Introduction Inspired by the prevailing needs of the Muslim public for Shariah compliant insurance products, takaful was launched in Malaysia in 1984 with the establishment of the first takaful operator i.e. Syarikat Takaful Malaysia Berhad (STMB) to complement the operation of the Islamic Bank. With a paid up capital of RM 10 million, the takaful industry has grown by leaps and bounds and now boasts of 8 takaful operators with a total contribution of RM1,720.9 million in The issuance of licences to more takaful operators is in tandem with Malaysia s aim to be the hub of Islamic finance. Globally, Malaysia is in the forefront in takaful business, outside the Arab region, despite being in the market for only 24 years. Part of the reasons for its positive development is due to a favorable and vibrant economy as well as political stability enjoyed by the nation in the last few decades. The takaful industry in Malaysia experienced robust growth vis-a-vis its conventional counterparts and has contributed significantly to the Malaysian economy. It has consistently registered strong growth and has proven to be resilient despite facing intense competition from the more advanced conventional insurers. Although takaful s penetration rate of 6.45% has been somewhat small compared to the overall insurance penetration rate of 43%, it has consistently registered annual growth rates of 57.9% and 44% in assets and net contributions (Takaful Annual report, 2006). Takaful s growth in Malaysia was triggered by the decree issued by the Malaysian National Fatwa Committee that declared that the conventional life insurance contradicted with the Islamic principles and considered haraam (void). Subsequently, the Fiqh Academy of the OIC made a declaration that all forms of conventional insurance do not adhere to the Islamic tenets. A task force was set up in 1982 and based on its recommendations, the Takaful Act 1984 was enacted to regulate the takaful activities.

2 2. LITERATURE REVIEW Malays and Insurance Malaysia is a country with a multi racial population; but with a Muslim majority. The major races are Malays, Indians and Chinese, with the Malays comprising almost 60% of the population (Malaysian Department of Statistics). In the past, many Malays being Muslims rejected having life insurance because of the haraam status associated with insurance (Bank Negara Malaysia,2004). Life Insurance was associated with interest and gambling and it is the Muslims belief that one should not put a price for one s life and to leave the matter of life and death in the hands of the Almighty. Nevertheless, not having life insurance protection especially in the event of untimely death or a misfortune can cause financial burden to the dependents as well as to the society. With the introduction of takaful as an Islamic Insurance, it was the hope of the Malaysian government that the Malays would undergo a paradigm shift and choose takaful as their financial protection. Takaful defined Takaful or Islamic insurance is based on the principles of shared responsibility and mutual cooperation for the protection of members in the event of a loss (Kwon, 2007). The fundamental concept of insurance, which is loss sharing is not against the Muslim religion. It is the operational system of the conventional insurance, which contains three elements i.e gharar (unclear/ambiguities), maisir (gambling) and riba (usury) that are deemed contradictory to the teachings of Islam ( MasumBillah, 2003, M. Fazli Yusuf,1996).There are currently two models of practiced in the takaful industry are the Mudharabah and the Wakalah models.the Mudharabah model involves the takaful operator managing the operation in return for a share of the surplus on underwriting and a share of profit from the investments. In the Wakalah model, the takaful operator acts as an agent/representative for the participants and administers and manages the takaful fund for a specific fund. Historical development of takaful in Malaysia The takaful industry in Malaysia has its inception in Malaysia to complement the services of the first Islamic Bank set up in There was a revival of Islam in Malaysia in the 1970 s and as result there was a sudden surge in the number of Muslims who wanted to lead their lives in accordance to the Shariah, including in the area of banking and finance ( Bank Negara Malaysia, 1999). From a single takaful operator in 1984, the Central Bank of Malaysia has further awarded takaful licences to conventional financial institutions, thus, by 2006 there were a total of 8 takaful operators. The sudden increase in the number of takaful is in line with the nation s aspiration to be the centre of Islamic finance as well as to attract new players of strong capacity in product development (Jaffer, 2006). By any standards, 20 or so years in the business is relatively new but nevertheless, the takaful business in Malaysia has proven to be resilient despite facing intense

3 competition from the more matured conventional insurers ; takaful s share in the Malaysian insurance industry is estimated to be worth US$1.85 billion. Presently, the takaful products offered are not only limited to family (life) and general takaful but also include other range of products which are at par with the conventional insurance, with the latest being bancatakaful and investment linked takaful. Guided by the Shariah s principles that emphasizes transparency and regulated by stringent requirements by the Central Bank of Malaysia as well as the Shariah Supervisory Board, takaful seems to augur well not only to Muslims but to Non Muslims as well. The dynamic investment strategies coupled with good corporate governance and attractive takaful products all pose as perfect ingredients to whet the appetite of any investor. Perception on Insurance Studies made by Princeton University (2003) revealed that customers associated unpleasant thoughts when discussing insurance and are overly concerned about the hazards they might faced. Tjahono (2003) also linked negative perception of the Indonesian consumers towards insurance, partly due to the highly aggressive and forceful selling methods and the unsatisfactory experiences they encountered with insurance companies. These factors contributed to the low penetration rate of life insurance in Indonesia. Dickson (1990) posits that insurance is a product sold and not bought and therefore the role of intermediaries cannot be understated. The sales of insurance policies are highly dependent on the services provided by the insurance agents since they are the forefronts of the insurance companies they represent (Yon Bahiah et al, 2007). Within the context of consumer behavior when purchasing services like insurance, several studies have discussed the importance of personal contact, trust, customer orientation between the sales person and the consumers as vital in developing and maintaining a successful service relationship (Nguyen and Gaston 2002, Swan et al, 1999, Tam and Wong, 2001). Consumers will tend to rely heavily on the external attributes of the service since it is difficult for them to evaluate the service itself. The marketing of services, like insurance, is different from the marketing of goods as it involves the element of intangibility (Lovelock and Wirtz 2004). 3.RESEARCH PROBLEMS & OBJECTIVES OF THE STUDY Despite the many efforts initiated by the Central Bank of Malaysia and relevant authorities to enhance the level of public awareness in Islamic Banking and takaful, the Governor of the Central Bank of Malaysia has called for more research efforts to seriously study as to why the Malays were not keen in purchasing life insurance even after the establishment of takaful. With more than half of the population comprising Muslims and an overall insurance penetration rate of 43%, it only goes to indicate that a large majority of the Muslims are not insured. In her keynote address at the International Conference on Islamic Insurance in London 2003, Datuk Dr

4 Zeti, the Governor Of Bank Negara, indicated that the percentage of the Muslim population that are insured in many Muslim countries are relatively low ; less than 5%. Takaful which was introduced as an alternative to conventional insurance has yet to penetrate the largely untapped Malay market. Specifically, this study was directed to provide insights into the following questions: - What is the level of perception and awareness of the Malays towards the services of the takaful operators? - What are the insurance needs of the Malays? - What are the factors hindering the Malays from purchasing takaful? 4. SIGNIFICANCE OF STUDY Despite having a dual insurance system, both Islamic insurance as well as conventional insurance, there is still a low acceptance rate of life insurance among the Malays. Takaful which was introduced as an alternative to conventional insurance was hoped to increase the percentage rate of Malays with life insurance. Although it has shown progress in this area, nevertheless the percentage increase was not too encouraging. To increase the penetration rate of takaful among the Malays, it is crucial to firstly explore and examine what the views of the Malays are towards takaful, how do they perceive takaful, what barriers do they face and what are their insurance needs. Hence, this exploratory study which addresses these issues would provide significant contributions for further improvement in the takaful industry. Alternatively, takaful operators could also use the results of this study to carve out new takaful products that would be in demand by the Malays. Contribution to the General body of Knowledge The main contribution of this study is to provide empirical research in identifying the perceptions and views of the Malays towards life insurance in general, and takaful, in specific. Since there is a dearth of literature on insurance in Malaysia, this research will help to improve the general body of knowledge in insurance studies, both academic and practical. Contribution to Practical Management Today s business environment is very competitive and challenging. Hence, organizations need to be strategically positioned so that they can increase their market share and remain dominant in the industry. Efforts must be continuously geared towards understanding the views and needs of the customers so that products and services offered meet their needs and expectations. In view of this, the findings of this study could definitely assist the takaful operators in understanding the needs of their target market and at the same time introduce products that are highly demanded. Ultimately, takaful operators could strategize their business to increase their penetration rate.

5 5.RESEARCH METHODOLOGY Research site and Sample The sample respondents for this research are the Malays residing in Shah Alam. The Malays were chosen because they are considered as the main target market in takaful business as well as the fact that the life insurance penetration rate of the Malays are far lower than the other race in Malaysia. The population for Shah Alam was obtained from the Municipal Board of Shah Alam. A stratified random sampling was employed and based on Sheaffer et al (1996) the following formula was used to determine the minimum sample required for this study. n = N 2 D + 2 i 3 i= 1 N ( p q) W i N ( p q) i Source: Sheaffer et al, 1996 The calculation revealed that the required sample size was196. Research Instrument The main instrument used in this study was the questionnaire which was developed based on a survey of literature and adapted from previous research. The contents of the questionnaire comprised questions to capture information pertaining to the level of awareness and perception of the Malays towards takaful as well to identify their insurance needs and the barriers they faced in purchasing takaful. The sections in the questionnaire are as follows :- i. Section A consists of questions relating to the demographic profile of the respondents. ii. Section B is directed to existing takaful participants and attempts to identify the medium that influence their purchase decisions, their insurance needs in the future and factors they considered important when purchasing takaful iii. Section C is targeted to non takaful participants and examines the factors hindering them from purchasing takaful. iv. Section D intends to gauge their overall perception on takaful and their views on the future development of takaful in Malaysia. Data Collection Convenient sampling was utilized to select the respondents in these areas and to ensure that a high response rate was obtained, personal interviews were conducted for these respondents. To ensure clarity, validity and readability to the research objectives, the questionnaires were firstly pilot tested to 10 respondents personally known to the researchers. Changes were made based on their feedback before developing the final version of the questionnaire.

6 Reliability Test Reliability tests of each composite of questions based on Cronbach s alpha were carried out. The tests results confirmed that most of the composites were reliable, as the Cronbach s alpha value associated with them was greater than FINDINGS AND INTERPRETATIONS Based on Table 1, 52% of the respondents are males and 48% being females; with a majority in the and age bracket. In terms of their level of education, 41% were only high school leavers, whilst 50% obtaining a diploma and above. Based on their age and their academic qualification, it was only expected that the majority (84%) earned incomes of RM4,000 and below with 76% employed in the private sector. Table 2 indicates that a high percentage of the respondents are aware of the existence of takaful. The high response rate is reflective of the aggressive promotional efforts of the takaful operators as well as the Central Bank of Malaysia in creating awareness of takaful. In addition, the takaful industry could be complimented for making its presence felt in the Malaysian financial landscape, especially after being in the market for almost 20 years. Table 3 grouped the respondents opinions on the meaning of takaful. Although various interpretations pertaining to takaful were received, they were eventually grouped as either insurance, Islamic insurance or a form of savings and investment scheme. 6% of the respondents did not answer this question. Although, the figure is small, it indicates a lack of concern or just plain indifference among the respondents. It could also be interpreted that the respondents considered this question as irrelevant since they could have answered Unaware or Uncertain to the earlier question. Upon further probing on the respondents perceptions towards takaful, it is generally safe to assume that the majority of the respondents are aware and familiar with takaful, namely its products as well as its operations see Table 4. This is again evident that to a large extent the promotional and communication strategies employed by takaful authorities have been somewhat successful. Table 5 shows that 79% or 154 of the respondents do not have family takaful. Hence, they were further asked on what are the factors limiting them from purchasing takaful products. The question on ownership of Family takaful was considered as relevant due to the fact that family takaful was not compulsory unlike certain general insurance policies; like motor insurance. When this group was asked whether they would purchase takaful in the future, only 46 or 30% indicate that they might do so. When further asked on the takaful plans that would most suited to their situation, the following responses were reported as shown on Table 7. Protection plan is the preferred choice since it would have been the least expensive as when compared to the education and investment plan. Annuity is not a favorite since it requires a lump sum at the onset of purchase.

7 Table 6 summarizes the factors hindering the Malays from purchasing Family takaful. Certain negative vibes were identified from their responses, examples, such as lack of information, returns are minimal, dissatisfaction with services of takaful agents, no difference between insurance and takaful, buying insurances was not a priority and lack of confidence with takaful. 7.CONCLUSIONS, IMPLICATIONS AND SUGGESTIONS FOR FUTURE RESEARCH Several implications can be concluded from the outcome of this research. The findings revealed that the Malays were aware of the existence of takaful, which was highly due to the aggressive promotional efforts of the relevant authorities to promote Islamic finance. Although takaful was linked to insurance, it need not necessarily indicate a positive perception in their eyes. Insurance has always had a negative connotation and that could probably be the reason as to why the Malays are shying away from takaful. The Malays do not feel that having family takaful or life insurance is important and were comfortable with the existing insurance plans or savings that they have. Lack of information and insufficient income to pay monthly premiums were also indicated as reasons why they do not have any family takaful. Takaful operators could also take cues from the findings, in particular pertaining to its current services. Customers would always expect excellent services especially in claim paying ability. The customers of today are able to make comparisons between takaful and conventional insurance and demand wide scope of coverage at affordable premiums. Compliance with the Shariah is not the only dominant factor for them to be convinced with takaful. The findings also imply that future takaful products that might be in demand would be those linked to protection plan, followed with education plan and savings and investments. Certain limitations have also been identified in the course of this research. To further generalize these exploratory findings, it is important to enlarge the number of sample size in future research. Future research should select regions to identify similar characteristics of the sample respondents. A longitudinal study would be most desirable, although this was not feasible to the researchers. Lastly, it can be concluded that there is vast potential for takaful in the Malay market. Bearing in mind, that there is a large, educated, young Malay population, takaful operators should work hard in coming up with new innovative products. Linking and collaborating themselves with big foreign insurers could give them the market edge especially in product development and market penetration, without jeopardizing the Islamic principles behind it.

8 REFERENCES Bank Negara Malaysia. Takaful Annual Reports Bank Negara Malaysia.( 2005) Islamic Banking and Finance Progress and Prospects. Collected Speeches Dr. Zeti Aziz Kuala Lumpur Dickson A.G (1990). Principles of Insurance. CII Tuition Service. London Jaffer, S (2006) Global Takaful Review : Evolving Trends, Opportunities and Challenges. Islamic Finance News Kwon, J W. Islamic Principle and Takaful Insurance : Reevaluation. Journal of Insurance Regulation; Fall 2007 ;26,1. Lovelock, C.H. and Wirtz, J (2004). Services Marketing: People, 5 th edition. NJ Mohd. Maasum Billah(2003) Islamic and Modern Insurance. Ilmiah Publisher, Kuala Lumpur. M. Fazli Yusof(1996). Takaful, Sistem Insurans islam. Utusan Publications & Distributors Sdn Bhd. Kuala Lumpur. Nguyen,N and Gaston, L. (2002) Contact personnel, physical environment and the perceived corporate image of intangible services by new clients, International Journal of Service Industry Management, Vol.13, no.3, Tjahono (2003). Life Insurance: One sure way to plan one s future.url Scheaffer, R.L.,Mendenhall,W. and Ott, R.L (1996). Elememtary Survey Sampling. 5 th Edition. Belmont. Duxbury Press. Swan, J.E;, BowersM.R, and Richardson, L.D. (1999) Customer trust in the salesperson: An intergrative review and meta-analysis of the empirical literature. Journal of Business Research, Vol Tam,J.L and Wong,Y.H (2001). Interactive selling : A dynamic framework for services, Journal of Services Marketing. Vol.15, No.. 5,

9 LIST OF TABLES Table 1: Demographic Profile of Respondents n= 196 N Percentage Gender Male Female Age Groups (years) and above Educational Background SPM STPM 15 8 Diploma Degree Masters/ Professional 9 5 Occupation Government Private sector Self Employed Student Others 14 7 Monthly income RM1,000 and below RM1,001 RM2, RM2,501 RM4, RM4,001 RM5, RM5,501 and above 9 5 Missing 17 9 Table 2: Awareness Towards Takaful ( n= 196 ) N Percentage Aware Uncertain Table 3: Meaning of Takaful N Percentage Takaful is Insurance Takaful is Islamic Insurance Takaful is a savings and investment Unanswered

10 Table 4 : Perceptions Towards Takaful n=196 Agree UC DA Mean SD Takaful products consist General and Family takaful General takaful is non life;such as motor, fire insurance. Family Takaful is life insurance; such as protection policy,educational annuity and investment plans. Takaful can be purchased through Agents, takaful counters or direct Takaful operations are based on Shariah laws. The elements of uncertainty, Gambling and usury differentiates takaful from Conventional insurance. Takaful is an asset to the purchaser Table 5 : Own Family takaful policies n = 196 N Percentage Yes No

11 Table 6 : Factor hindering the Malays from purchasing Family takaful n=154 Factor Agree UC DA mean SD Insufficient monthly Income. Lack of information Have alternative coverages Have insurance policies with Other companies Returns on takaful minimal Insurance not a priority Lack of confidence on takaful Dissatisfaction with services Of takaful. No difference between takaful And conventional insurance. Have sufficient savings Table7: Choice of Future Takaful / Insurance plans n=46 N percentage Protection plan Education Investment Annuity 3 7

12 Table 8: Factors influencing Malays Purchase decision on Takaful Factor Ranking Scope of policy 1 Claims paying ability 2 Customers Service 3 Convenience 3 Product pricing 3