High growth potential for Malaysia’s takaful segment

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KUCHING: RAM Ratings Services Bhd (RAM Ratings) sees high growth potential in Malaysia’s takaful segment as its contributions have charted double-digit growth and expanded at twice the rate of conventional insurance.

Of note, the takaful segment’s growth rate over a five-year compounded annual growth rate (CAGR) is 16 per cent for general and 14 per cent for family.

The ratings agency in a recent commentary, opined: “Optimistically, if the industry continues on its  high-growth trajectory of about 15 to 20 per cent per annum, it could reach half the size of the conventional industry by 2018, making the sector potentially much more lucrative to investors.

“The growth of takaful is also well supported by the country’s developed Islamic finance industry.”

It noted that Malaysia’s takaful sector’s landscape is evolving at an even faster pace as the main changes involve capital requirements.

“The Risk-based Capital Framework for Takaful Operators (RBCT), which came into effect on January 1, 2014, requires takaful operators (TOs) to maintain capital-adequacy levels that are in line with the risk profiles of their operations.

“For some TOs, this could mean additional capital injections or borrowings to shore up their capital bases.

“Except for RAM-rated TOs, it is not yet known if all 11 TOs in Malaysia have fully met their RBCT requirements.

“Another imminent regulatory change for the industry is the Islamic Financial Services Act 2013 (IFSA) requirement for composite TOs to legally separate their general and family businesses by 2018; this would affect eight out of the 11 operators.

“The additional capital and resource requirements imposed by these changes could drive the sector’s consolidation over the next few years, particularly among smaller TOs with insufficient scale to justify the additional investment in separate licences, particularly with respect to the general takaful segment (which is about a third the size of family takaful),” it said.

Nevertheless, as it is, the size (and penetration rate) of the Malaysian takaful industry is about a fifth of that of conventional insurance, with the top three TOs collectively commanding 70 per cent of the industry’s contributions, which largely stem from family takaful, it added.

Additionally, another imminent change in the general insurance/takaful sector is the deregulation of motor tariffs, largely expected in 2016.

“This is in line with Bank Negara Malaysia’s (BNM) New Motor Cover Framework, which aims to redress the structural issues in the motor sector.

“There are significant mismatches in the present structures, as statutory-controlled motor premiums have not changed much since 1973 despite increasingly more accidents and claims costs.

“The claims ratio for motor insurance remained relatively high at 72.7 per cent in fiscal 2013 (last five-year average: 76.5 per cent), compounded by ‘Act’ cover claims that have historically come in well over 200 per cent.

“In preparation for the transition to market pricing, BNM has allowed premiums to be adjusted upwards annually since 2012, although these increments have been nominal to date,” it explained.

The lifting of tariffs bodes well for insurers and TOs, as it will alleviate cost pressures from underwriting the largest segment of general insurance (motor constitutes 47 per centof gross general premiums), RAM Ratings opined.

“The move will also spur greater competition and, possibly, some price-undercutting during the initial stage as insurers and TOs strive to retain market shares and attract new customers via differentiated premiums. Such an environment will favour established insurers and TOs with strong balance sheets and the right expertise to accurately price risks based on driver and vehicle traits,” it added.

Eventually, however, it said premiums are likely to rise to levels that reflect the underlying claims experience, in addition to providing reasonable underwriting margins for insurers.

On the other hand, it pointed out the lifting of fire tariffs would potentially trigger more intense competition and price wars among players, given the lucrative margins of the segment. Overall, the ratings agency expects double digit growth for the takaful segment given its positive growth potential.