“Allah carte” insurance powers ahead
Co-operative “takaful” insurance model, designed to be compliant with Sharia law, is a promising source of M&A activity


	U.A.E-based Takaful Emarat Insurance’s net profit jumps by nearly 800% to $3m
	Fitch identifies M&A opportunities in the fast-growing Malaysian takaful sector
	Zurich insurance acquires MAA Takaful to better penetrate Gulf and Southeast Asia


Curation Comment

The sudden flowering of takaful insurance is a great example of how technology is allowing niche financial solutions to flourish and scale to the point where large operators like Zurich are stepping in to leverage that scale into new segments. It is an example of how a sudden boom can lead to an over-crowded and murky marketplace, and lead to calls for regulatory clarity and international harmonization, especially as insurance claims start ramping up and customers start to discover that the companies underwriting them are not properly funded. Fitch thus predicts further M&A action in the sector particularly as minimum risk-based capital requirements and risk practices get introduced, as has happened in Malaysia, causing operators with limited scale and capital burdens to exit or merge over time.

 

Growing faster than conventional insurance lines, Malaysia’s takaful, or Islamic insurance, industry recorded a positive performance in 2015. In addition, the industry is expected to expand further in 2016. The central bank, Bank Negara Malaysia (BNM), has been taking steps to actively promote the takaful segment. Although volatility in the financial markets continues in 2016, the segment’s growth prospects remain positive.

According to BNM, Malaysia is the leading regional takaful market within ASEAN. Family takaful, or long-term life policies, represents approximately two-thirds of the takaful industry in Malaysia, and the rest is general takaful. Growth potential for the segment is favourable, particularly due to encouraging demographics.

Recent Growth

In January 2016 the ratings agency Fitch reported that Malaysia’s takaful segment recorded robust growth in 2015. Family takaful, which comprised 29.7% of total new life insurance business during the first six months of 2015, rose by 9.7% in the first half of the year, while general takaful by gross direct contributions, which comprised 11.6% of new general insurance business, rose by 8.3% during the same period. In comparison, conventional general non-life grew by 6.6%, and the life segment dropped by 0.4% in the first half of 2015, according to Fitch.

Meanwhile, BNM’s “Financial Stability and Payment Systems Report 2015” stated that takaful operators in Malaysia remained strong throughout 2015, with excess capital buffers well above the minimum amount of RM46bn ($11.4bn) required by regulations – at RM117.3bn ($29bn).

Challenges

Despite their strong growth prospects, both segments within the takaful industry faced challenging macroeconomic conditions in 2015, and it is likely that they will continue to grapple with unstable markets in 2016. “General takaful is mainly concentrated in the retail sector. As such, growth has moderated in view of a more cautious sentiment coming from households,” a spokesperson from BNM told OBG. “On the family takaful side, business is mainly concentrated on credit-related products, which are correlated with loan growth in the banking sector.”

Rising claims could also be an issue. The takaful industry’s total net claims payout rose by 18% y-o-y in 2014. According to Fitch, takaful operators’ expense rates will likely remain stable, although they will gradually absorb rising claims from medical inflation and bonus payouts to policyholders.

Takaful Reforms

BNM has moved to implement a number of initiatives aimed at improving the business environment and strengthening consumer protection within the takaful segment.

Outside of the new Life Insurance and Family Takaful Framework, the most significant of these has been minimum risk-based capital requirements, which were extended to the takaful segment in January 2014. Takaful operators are also required to independently finance and run insurance units, meaning operators with limited scale and high capital burdens will either exit or merge. Indeed, Fitch expects mergers and acquisitions within Malaysia’s insurance sector to continue, largely due to ongoing regulatory reforms.

Sharia Compliance

Stringent sharia compliance is also a significant policy consideration. The BNM report stated that progress has been made on developing a comprehensive sharia contract-based regulatory framework. BNM passed amendments to the Development Financial Institutions Act 2002, which went into effect in January 2016. The amendments, which aim to strengthen the existing regulatory framework for developing financial institutions, also incorporate new provisions for regulating sharia governance.