www.bestweek.com BESTW Weekly EEK Asia/Pacific Insurance Newsletter November 2011 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 deveopments 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 Takaful in Malaysia The top players are still the so-called early established operators, namely, Etiqa Takaful, Syarikat Takaful Malaysia and Takaful Ikhlas. However, the total market shares of these three are reducing by year. No. Name Ownership Family (Life) Takaful Operators 1. AIA AFG Takaful Bhd. Foreign 2. Great Eastern Takaful Sdn Bhd Foreign 3. ING Public Takaful Ehsan Berhad Foreign Composite Takaful Operators 1. CIMB Aviva Takaful Berhad Local 2. Etiqa Takaful Berhad Local 3. Hong Leong MSIG Takaful Berhad Local Re-Takaful 1. ACR Retakaful SEA Berhad Local 2. MNRB Retakaful Berhad Local 3. Munich Re Retakaful Foreign Composite International Takaful Operators 1. AIA Takaful International Berhad Foreign Source: Malaysia Takaful Association 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 readymade 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 Continued on page 2 Copyright 2012 by A.M. Best Company, Inc. ALL RIGHTS RESERVED. No part of this report or document may be distributed in any electronic form or by any means, or stored in a database or retrieval system, without the prior written permission of the A.M. Best Company. Refer to our Terms of Use for additional details.
BESTWEEK Continued from page 1 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. Three foreignowned 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 Key Takaful Indicators The [risk-based capital] framework draft for takaful is more stringent than the existing one for conventional insurers. rs. Marcel Omar Papp Swiss Re, Malaysia 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, The arrival of new players has forced existing players to beef up their game, 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 Market Structure 1 2006 2007 2008 2009 2010 No. of Registered Takaful Operators 2 8 8 8 8 9 No. of Agents 15,194 43,843 60,197 88,895 74,089 Family 11,188 32,987 44,222 55,898 42,698 General 4,006 10,856 15,975 32,997 31,391 No. of Offices 151 154 157 104 106 No. of Employees 2,967 2,863 2,411 2,499 2,713 Takaful Fund Assets Total (RM million) 6,899.0 8,818.3 10,569.4 12,445.8 14,691.1 Family 5,800.9 7,445.2 8,900.1 10,536.6 12,445.3 General 1,098.1 1,373.1 1,669.3 1,909.2 2,245.7 % of Gross National Income 1.2 1.6 1.5 1.9 2.0 % of total assets of the insurance and takaful 5.9 6.7 7.5 7.6 8.0 industry 1 As at 31 December 2 Direct composite and family takaful operators Numbers may not necessarily add up due to rounding Source: Bank Negara Malaysia Takaful regulation in Malaysia is robust and advancing well, in tandem with market developments and consumer expectations. Brandon Bruce Ernst & Young The government has played a prominent role through market liberalization, building Islamic finance foundations and promoting business development across s Malaysia. Azim Mithani Prudential BSN Takaful Bhd 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. 2 BestWeek AsiA/PAcific November 2011
For Takaful, Fiscal Constraints Mean a Rough Growth Path BESTWEEK Operators of Takaful, or Islamcompliant insurance, will need to focus on underwriting quality, cost management and investment discipline as financial performance remains a challenge for many markets in the current fluctuating investment environment. Investment returns are low under current economic conditions, so takaful operators have to rely more on underwriting profit, said Marcel Omar Papp, head of retakaful at Swiss Re. Investment is one challenge for takaful operators, who tend to rely on equities or real estate, which are more volatile than other investment opportunities. It s often difficult for them to get a share of other Shariahcompliant investment tools such as sukuks [Islamic bonds] as they tend to be oversubscribed, A dearth of Shariah-compliant capital market instruments is exerting pressure on returns, said Brandon Bruce, senior executive officer of assurance at consultancy Ernst & Young. Some companies have high direct exposure to equity markets to maximize returns. In general, Bruce noted there is less strategic planning seen and a more adhoc approach to investment portfolio management. In several countries, more stringent regulations will restrict Bruce this practice. Takaful operators from Gulf Cooperation Council countries including Saudi Arabia, United Arab Emirates, Qatar, Oman, Bahrain and Kuwait adopted a more aggressive investment strategy with 44.3% of the typical portfolio in real estate and equities in 2010, compared to 32.1% for Malaysian operators on average. Consequently, GCC operators recorded more volatile investment returns of 3% in 2010, -4% in 2009 and -2% in 2008, according to Ernst & Young. Malaysian operators on average posted stable investment yields of 3% or 4% over the past five years. Takaful operators mainly raise capital through debt, equity or decreasing risk. Papp said most operators Global Takaful Contributions Continued strong growth in the Takaful industry suggest that global contributions could reach US$12 billion by 2011. 15000 12000 9000 6000 3000 0 6,975 9,148 11,999 Growth in 2009 = 31% 2009 193 39 337 1,480 4,886 Source: Ernst & Young 357 55 477 1,912 2010(e) 6,380 2011(f) 661 76 602 2,471 8,330 GCC 31% South-East Asia 29% Africa 26% Levant 40% Indian Sub-Continent 85% seem to be well capitalized as many companies have only been set up in the past few years and their business volumes are not yet significant. Most takaful companies are highly capitalized at this early stage of development, with sufficient levels to achieve operational maturity, according to an A.M. Best Co. report. In many cases, takaful funds have low levels of excess resources as these are retained at the operator/ shareholder level. With expected growth and new risk-based capital regulations, this may change. The volatile capital markets do not help as takaful operators may be overexposed to religiously acceptable, but potentially volatile ill-liquid assets such as equities or real estate, Papp noted the capital needs of takaful operators may rise in the short to medium term. With rising equity costs and limited Islamic debt instruments, Papp said retakaful may become another viable option to meet increasing capital needs. On the underwriting side, Papp said there is an inherent danger that a company maximizes its income by increasing its business too much. Companies will be in difficulty once premiums stop rising and claims catch up. Most takaful operators have yet to achieve critical business volume and expense ratios remain higher than conventional insurers. Also, service quality remains suboptimal for many operators, said Bruce. Takaful operators need to earn sufficient wakala [agency] fees for the shareholder fund to meet operational expenses. Ensuring profitability may lead to substandard risks being accepted to boost volume and growth, bringing negative impacts on loss ratios, said Bruce. Bruce also noted complex risks are not well understood and potentially mispriced. Portfolios are suboptimal for many operators, with concentrations in motor lines for general takaful and single contribution mortgage and credit term business for family takaful. Access to lucrative commercial lines is limited due to underdeveloped broker relationships. Continued on page 4 November 2011 BestWeek AsiA/PAcific 3
BESTWEEK Asia/Pacific Continued from page 3 In various countries, Papp said takaful operators show more mixed results than conventional insurers. General takaful operators in Malaysia recorded better results than conventional insurers but the case was opposite in the Middle East. Most general takaful operators tend to compete with conventional insurers on price because most start-up companies are falling behind their original business plans, said A.M. Best in its report. Takaful operators financial performance tends to be inferior to conventional insurers, it added. The nature of risk sharing makes takaful more suit- Audio: Listen to an interview with Marcel Omar Papp, head of retakaful at Swiss Re, at www.ambest.com/audio. Takaful is a form of protection scheme based on risk sharing by participants on co-operative principles instead of risk transfer to a third party, the operator. Azli Munani chief executive officer and executive secretary of Malaysian Takaful Association ed to personal lines, which tend to be less volatile but with lower margins than commercial lines. Takaful operators also encounter additional costs for Shariah compliance. Papp said the shareholder of a takaful operator should expect a lower profit margin but maybe also more stable profits compared to a conventional insurer. Overall, family business is more profitable than general takaful and is growing at a fast pace, said A.M. Best. Family takaful is also outpacing conventional life insurance, thereby representing the greatest opportunity for profitable growth of takaful operators, A.M. Best said. Takaful: Market Opportunities Growing Family takaful, or Islam-compliant insurance, could spark potential growth for investment-linked products in Malaysia and Indonesia. Takaful market opportunities, especially in the investment-linked class, are substantial, given the low penetration, rising income, growing population and knowledge in this sector, said Azim Mithani, chief executive officer of Prudential BSN Takaful Bhd., the U.K.-based Prudential s Malaysian takaful venture, with 49% of shares. The company initiated a special linked product offering spiritual fulfillment, protection and savings to pique the interest of potential customers, Mithani said. Prudential BSN also offers a series of investment-linked products combined with family, health and education protection. New business contributions from investment-linked products increased to 402.7 million ringgit (US$125.3 million) in 2010 from 362.8 million ringgit in 2009, according to Bank Negara Malaysia, the country s central bank and regulator. Investment-linked products accounted for 15.6% of the total 2.6 billion ringgit new takaful business contributions. Prudential s joint venture partner, Bank Simpanan Nasional, has laid down a good platform for bancatakaful distribution, given the bank s extensive branch network and established brand equity, according to Mithani. Mithani said the company believes in broad-based distribution for boosting growth. With 8,500 Prudential agents and 1,600 Prudential BSN direct agents, Mithani stressed the importance of having a strong and professional sales force. The company also forms bancatakaful 4 BestWeek AsiA/PAcific November 2011 Family Takaful New business contributions from investment-linked products. (ringgit million) 2006 2007 2008 2009 2010 Contribution 210.4 614.7 764.8 362.8 402.7 % Change 200.1 192.2 24.4-52.6 11.0 % Share 16.6 41.3 38.6 16.7 15.6 Source: Bank Negara Malaysia partnerships with established financial institutions such as BSN and Affin Islamic Bank. In Malaysia, Prudential BSN achieved a 31% market share of new takaful business for the regular contribution segment in 2010. Product growth is driven by both agency channels and bancatakaful, noted Mithani. Mithani said Prudential BSN managed to achieve profitable underwriting in four years, with the focus on efficient distribution and operation. Strong risk management in underwriting and claims is also essential, he added. Takaful business is fairly new in the market and as such, there is immense room to grow and develop innovative products, said Mithani. However, the challenge is getting the right talent to support the fast-growing industry, compared to traditional insurance. In investment, Mithani said the Islamic debt security market poses the greatest challenge in terms of availabil Continued: OPPORTUNITIES, page 5
BESTWEEK Continued from page 4 ity. Prudential BSN invests largely in equities and Islamic debt securities. Shariah, or Islamic law, compliance is a key difference of takaful s operating model, he said. Mithani said we see an increasing need for Shariah protection and investment plans, since the launch of Prudential BSN in 2006. Takaful is one of the fastestgrowing Islamic financial sectors in Malaysia, growing 20% to 25% per year Takaful business is fairly new in the market and as such, there is immense room to grow and develop innovative products. Azim Mithani, chief executive officer of Prudential BSN Takaful Bhd. during the past five years. Prudential BSN also offers general takaful products for home, personal possessions and accident protection. The government has played a prominent role by laying down Islamic finance foundations, market liberalization and encouraging takaful operators to accelerate development. In Indonesia, Prudential captured 54% of Shariah market share, in terms of premium income, as the leading player. Introduction of investment linked products and expansion into rural areas contributed to the increasing proportion of Muslim customers to 41% in 2010 from 26% in 2006, said Prudential in a presentation. Shariah-linked products presented 17% of new business mix for Prudential s life business in Indonesia for the first half of this year. November 2011 BestWeek Asia/Pacific 5