country study takaful markets in selected asia countries

7/29/2019 Country Study Takaful Markets in Selected Asia Countries

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Asia-Pacific Journal of Risk and

Insurance

Volume 2, Issue 2 2008 Article 8

Country Study: Takaful Markets in Selected

Asia Countries

Editorial Team of Asia Insurance Review

Copyright c2008 Asia-Pacific Risk and Insurance Association. All rights reserved.


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Country Study: Takaful Markets in Selected Asia Countries

Asia Insurance Review+

I. Malaysia

The country introduced the Takaful Act in 1984, and it has been 24 years since the firsttakaful company Syarikat Takaful Malaysia was established. The total net contributions for2006 (based on May 2007 reporting) amounted to RM1.72 billion, up 29% year-on-year.Family takaful contributions went up 74.6% over 2005 to RM1.27 billion, while gross generaltakaful contributions jumped 29.5% to RM717.2 million. Group and investment-linkedproducts (ILPs) surged by 326.6% and 200.1% over 2005 to RM622.7 million and RM210.4million, respectively.

Bank Negara Malaysia (BNM), the central bank of Malaysia, is focused on establishing thecountry as a strong international centre for takaful and retakaful (reinsurance for takaful) aswell as an Islamic finance hub. With BNM now allowing foreign entities to own 49% oftakaful businesses in strategic alliances with local companies, this will further strengthen theoverall industry in terms of having stronger and more qualified market participants.

One of the hot topics facing the industry is the issue of shared services. BNM is activelypromoting this initiative that aims to pool together resources of existing takaful companiesand outsource them to create economies of scale, particularly in the backend operationssuch as claims processing and the like. While some companies are very keen on thisinitiative, there are also others who are reluctant to follow, citing fears of losing their keycompetitive advantage (backend operations) if they were to follow. Currently, there areabout four takaful operators who are supporting the initiative.

II. Pakistan

In Pakistan, no new life conventional companies have been established in Pakistan over thepast 12 years. Soon after the introduction of Takaful Rules, however, the country saw itsfirst general takaful operator (Pak Kuwait Takaful) in 2005. Since then, two more operatorsin general takaful insurance (Takaful Pakistan and Pak-Qatar General) and one in family(life) takaful insurance (Pak Qatar Family Takaful) have commenced operations.

Islamic banks in Pakistan are required by Shariah laws to insure themselves with a takafuloperator, once available. Hence, the growth of Islamic banking will also provide synergy tothe growth of takaful and the resulting growth potential is enormous. Islamic banks andfinancial institutions play a strategic and important role in the distribution of takaful products.

Just as bancassurance played an important role in the distribution of personal linesinsurance products, bancatakaful is an important driver for takaful. One may say that the

+ This article is based on Takaful Asias Diverse Takaful Markets,Asia Insurance Review(March 2008) and reprinted with the permission and support of the editorial board of themagazine.

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: Country Study: Takaful Markets in Selected Asia Countries

Published by Asia-Pacific Risk and Insurance Association, 2008


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success of takaful depends largely on the performance of Islamic financial institutions on aglobal basis and how integrated they become. Islamic banking presently stands atapproximately 3.2% of the total banking sector PKR4.4 trillion (US$70 billion) in totalassets), and the State Bank of Pakistan is pushing to bring this ratio to 15% in the next few

years. These values make it very clear that there exists a significant gap in the market forfinancial protection tools in Pakistan. This gap is a big opportunity for takaful as well.

There are significant challenges for takaful in Pakistan. These include:

x Education and Awareness. This is definitely the most obvious issue which newtakaful operators have to deal with. People have a lot of misconceptions about theneed for risk mitigation, Islamic modes of financing and the difference that takafulwould offer.

x Human Resource. Considering the rapid growth in all sectors of economy, thecountry is suffering from a dearth of trained and experienced human resource. Thisissue is faced by all the industries generally and financial sectors specifically.

x Ambiguity in Regulatory Statutes. Given how recently the rules were formulatedby the Securities and Exchange Commission, there still remain a lot of aspectswhich need clarity. The regulators are still undecided about allowing windowoperations to exiting conventional insurers. If regulators decide to allow windowoperations, it would be detrimental to the takaful cause and pose difficulty for thededicated players.

x Uncertainty in Dealing with the Law. As with the regulatory rules, takaful has alsonot had to deal with the courts yet. Thus, here also there is an element ofuncertainty as to how the contracts, which are designed in light of Shariah rulings,would be interpreted in a court of law.

x Thin Margins. Unlike conventional insurance companies, takaful operators primarysource of revenue is the wakala fee which they will collect from every contribution.

This leaves relatively little room to maneuver and so they will need to work veryhard to ensure that their operations are not just very effective, but also very lean. Toachieve this, they will need to invest heavily in technology.

Thus, the challenges are not small by any measure, but they can definitely be overcome.

The market needs and expects many more players as the capacity of three players islargely insufficient and the demand is likely to be much higher. If the present and futuretakaful operators take the challenges by the horn and strive to provide products which meetthe needs of the people, are priced so that they can be affordable, are serviced in acustomer-centric manner, and finally consider Shariah limitations as their strength, there isno reason takaful cannot be successful in Pakistan. In fact, it can easily achieve levelswhich even the present insurance companies have thus far been unable to reach.

III. Sri Lanka

There are still only two takaful operators in the market. With the first entrance into thetakaful market by Amana Takaful, the tough legal barriers for entry were at least overcomein 2002. Ceylinco Takaful Ltd. entered in 2006 as the second takaful operator in the market.

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DOI: 10.2202/2153-3792.1025


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The successful operations of takaful require a proper mix of insurance technical know-howand Shariah knowledge. But in reality, these two fields of study remain far apart, and it is,indeed, a challenge to achieve the proper mix. A person who is well-versed in both fields isa rare commodity. As a result, the takaful concept has been vaguely understood and loosely

practiced. The task of educating takaful workers and Shariah supervisors is a daunting onebecause of the following constraints:

x The non-availability of competent trainers and educators.

x The lack of educational institutions locally or in neighboring countries offeringtakaful education.

x The high cost involved in learning the subject from institutes based in the MiddleEast and Far East countries.

x The reluctance on the part of Shariah supervisors to acquire sufficient knowledgeon insurance.

For example, the concept of takaful has been misunderstood. A strong religious flavor hasbeen attached to takaful, resulting in widespread belief that takaful is for Muslims only.Eradicating this fallacy and creating the right mindset that is favorable to takaful is an urgentnecessity. Besides, carrying out an intensive and effective awareness campaign requires ahuge budget which a new takaful company with limited resources could hardly afford.

The existing legal framework places takaful companies in a handicapped position comparedto conventional insurers. The present set of regulations, evolved over a period of time, wasintended to regulate conventional insurers, but the same set is being used to regulatetakaful companies as well. This deprives takaful companies of a level playing field.

Various restrictions laid by insurance regulators on the choice of investment avenues forinsurance fund serve only to add to the burden of a takaful company. The dearth of Shariah-compliant investment opportunities in Sri Lanka is another hurdle. Thus, takaful companies

are left with very limited investment choices.

At present, takaful operations in Sri Lanka, to a large extent, follow those of conventionalinsurance mainly because the management team comprises persons recruited fromconventional insurance companies, and these persons have little or no knowledge ofShariah aspects.

A quick transformation from conventional culture to takaful culture and adherence to Islamicvalues is of paramount importance if the true spirit of takaful were to be preserved. Thepurity of takaful is at stake unless and until risks are fully covered by retakaful arrangementsbacked by very strong retakaful companies. Due to the dearth of strong retakaful playersacceptable to the regulators, takaful companies have no alternative but to seek support fromconventional reinsurance market.

There are ample opportunities available in Sri Lanka for the growth of takaful. Demand forgeneral takaful products, in particular, is on the increase. The market share of takafulbusiness in the general class increased from 1.71% in 2005 to 2.33% in 2006. However, thefamily takaful remains to be developed.

Regulators are considering changing the present minimum capital requirement to risk-basedcapital. This will be a welcome gesture to new and small players. Sri Lanka is a growingmarket for insurance business and takaful has a place and a role to play.

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IV. Indonesia

Takaful in Indonesia started only in the mid-1990s. General takaful was introduced in 1995,while family takaful made its appearance only in 2000. Most of the existing players in the

market operate through windows which were introduced to encourage more entrants to thelucrative business and promote the growth of the industry. Under this initiative, thosewishing to enter the takaful business are required to have a startup capital of only Rp2billion (about US$200,000). As a result, there has been a big jump in the number of takafuloperators in the last five years. As of November 2007, there were 38 takaful operators in thecountry. PT Tugu Reasuransi Indonesia, one of the countrys local reinsurers, is alsoexpecting to receive its license to start a takaful window this year. If successful, it willincrease the number of local reinsurers with takaful operations to four.

Although relatively new, the growth rate posted by the takaful industry is staggering. Since2002, premiums, assets and net income have posted double-digit growth with no signs ofslowing down. In fact, with increasing public awareness and more entrants into the market,the industry is poised to grow even faster. For the first nine months of 2007, premiums fromfamily and general takaful already exceeded that for the whole of 2006. Family takaful rose3.6% to Rp292.27 billion, while general takaful jumped 48.0% to Rp369.51 billion.

Even with the impressive growth figures, however, takaful still commands a minute share ofthe entire Indonesia insurance market. Takaful premiums are equivalent to only 1.38% ofthe total premiums collected by the conventional business in 2006, while takaful assets isequivalent to only 1.22% of that of their conventional counterparts. This is further proof ofthe potential of takaful in Indonesia. Other issues facing the takaful Industry include: lowcapital, lack of product innovation, dearth of qualified talent, non standalone Shariahregulator, and low public awareness.

V. Thailand

Thailand is a non-Muslim country, but at least 15% of the Thai population are Muslim. Thismeans that out of the 60 million total population of Thailand, there are approximately 13million Muslims. And, almost 80% of people in the southern part of Thailand are Muslim.Since many Muslim families suffered the loss of properties and breadwinners of familieswith no protection after the Asian Tsunami of 2004, Finansa Life Assurance (FLA) decidedto penetrate the Muslim market with Finansa Takaful. Specifically, FLA set up the FinansaShariah Committee which consists of Islamic scholars to educate its Takaful TaskforceCommittee and staff on the rules and principles of Islamic laws. The product was approvedin January 2006 and FLA received a verified letter from the Chief of Muslims in Thailand toprove that the product does not contradict Islamic Laws.

Like everything new, Finansa Takaful products have taken some time to develop. It had tolobby and defend the concept with the regulators. It has received both positive and negativefeedback from Muslims: some members of the public still question its products. Finansatakaful products are developed not only for Muslims, but also for non-Muslims. Thecompany believes that as more people buy takaful products and with the growth in themarket, more newcomers will enter to share the pie. There are already two new competitors.

VI. Brunei Darussalam

In January 2006, the Ministry of Finance set up the Syariah Financial Supervisory Boardwhich has the authority for the ascertainment of the Laws of Islam for the purposes of

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DOI: 10.2202/2153-3792.1025


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Islamic banking, takaful, Islamic financial and Islamic development financial businesses, aswell as any other businesses which are based on Shariah principles. With the enactment ofthis order, any business dealing of financial institutions in Brunei that concerns thedistribution of Islamic products needs to be submitted to the board for approval.

There are three takaful operators that underwrite a gross premium of B$55.3 million (US$39million) as of 2005. The market is small in terms of premium generated, but there are toomany players in the market.

A new Insurance Order and Insurance Regulations 2006 encompassing life and generalinsurance business was passed as part of the ongoing exercise to enhance insurancesupervision in line with international best practice. In addition, it is also intended to ensurethat insurers remain financially strong and that the interests of the public as policyholdersare protected. However, there is as yet no legislation to regulate the takaful industry. Ascommonly practiced by countries where takaful legislation is not enacted, the regulatoryframework of takaful players resembles that of conventional insurance. This has resulted in,as some commentators have argued, takaful providers facing difficulties in competing withconventional insurers.

VII. India

India could have its first takaful insurance scheme in 2008 if the plan by Pune-based BajajAllianz Life Insurance, in association with Parsoli Insurance Broking Ltd., is approved by theInsurance Regulatory & Development Authority (IRDA). It is planning to first offer a unit-linked insurance plan (ULIP), and Bajaj Allianz currently has a pure fund that does notinvest in breweries or other industries perceived as unethical under Shariah laws.

The ULIP scheme will invest in BSE Sensex and mid-cap stocks, 60% of which are Shariah-compliant. Apart from insurance schemes, the firm also plans to offer pension schemes withULIP features. Parsoli is also negotiating with other insurers to introduce similar Shariah-

compliant schemes and is targeting to collect Rs150 crore (US$40 million) in premiums forboth the life and general insurance businesses in fiscal year 2008-2009.

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country study takaful markets in selected asia countries

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