2022 has so far been a year of mixed fortunes for the Takaful industry in the region. While it continued its growth path, several Takaful companies have sustained losses from big market events and a difficult economic situation.
Review of 2022
The General Takaful industry in Malaysia grew 19.8% in the first half of the year with a gross written contribution of RM2.23 billion (US$477.96 million), increasing its market share from 15.5% to 18.5% a year ago.
However, the impressive growth ratio is partially due to the following: (1) the economy was still struggling with the effects of COVID-19 in 2021, and (2) tax incentives were provided in the first half of 2022, which boosted car sales and led to a higher motor Takaful takeup rate.
Meanwhile, the industry’ combined ratio significantly increased in the first six months of the year by 11.6%, rising from 92.2% in 2021 to 103.8%. The surge in the combined ratio is driven by the increase in net claims, for example due to flood losses, and a higher claims ratio of the motor business which climbed from 61% to 74.2%.
Although the 2022 increase is not a complete surprise given the relatively low claims ratio in 2021 amid Malaysia’s prolonged lockdown, General Takaful’s motor business performance is worrying compared with general insurers, whose claims ratio is 10% lower at 64.3%.
For Family Takaful operators, after a strong rebound in Malaysia last year with a 29.1% increase in new business, they are struggling to keep the growth momentum. Unfavorable investment valuations and cost pressures weakened the profit performance of the Family Takaful sector.
In Indonesia, the Takaful sector is also facing profitability challenges due to COVID-19 losses on the Family Takaful side and disappointing performance of the credit portfolio for General Takaful.
Regulatory activities continued to pick up in 2022. In Malaysia, Bank Negara Malaysia launched the Financial Sector Blueprint (FSB) 2022-26 in January. Among other new regulations, it issued two discussion papers each on Shariah-related matters (ie Ta’awun; Hajah) and relating to climate change (ie ‘Climate Risk Management & Scenario Analysis’; ‘Climate Risk Stress Testing Exercise’). All these regulations will have an impact on the Takaful industry.
In Indonesia, the spin-off requirements by 2024 are still going ahead, and the preparation for the upcoming implementation of IFRS 17 is continuing across the region.
Preview of 2023
The FSB has defined three desired outcomes for Malaysia:
1. Finance for all, which aims to offer diverse choices to customers such as ‘digital first’ solutions, to strengthen financial safety nets and cultivate confident and capable financial consumers. This is especially important as the severe floods and other events earlier in the year have shown that there is still a significant protection gap in the country.
2. Finance for transformation is about enabling growth in alternative finance, facilitating deeper global integration for Islamic finance and establishing a vibrant financial landscape. In this respect, it will be interesting to see whether digital Takaful operators’ entry expected in 2023 will lead to a changing Takaful landscape.
3. Finance for sustainability aims for a wider adoption of value-based intermediation (VBI) to serve the economy, community and environment with steady progress in greening finance and financing green. The implementation of VBI by the Takaful industry can play an important role in achieving sustainable growth of the industry in the coming years.
These ambitions were set amid a challenging economic outlook with rising inflation and a potential economic downturn. Moreover, further liberalization of motor and fire tariffs will likely lead to greater competition in these segments. All these could put additional pressure on Takaful operators’ results and will need to be addressed in the coming year.
In addition to some of these common themes, there are other specific aspects for individual countries to consider in 2023. For example, in Indonesia, the key question remains whether the regulator will proceed with its requirement for Shariah business units to convert to fully-fledged Takaful operations by 2024. Until now, only a few Takaful window operations have done so even though the deadline to submit revised spin-off plans has passed.
Other structural challenges in Indonesia include: (1) developing an Islamic finance ecosystem that supports Takaful operators, (2) attracting adequate capital, (3) strengthening the regulatory framework, (4) raising awareness of Islamic finance products, and (5) improving the market’s results.
Besides Brunei — where Takaful already has a major market share — Takaful continues to expand its footprint in other regional countries, such as the Maldives, Sri Lanka and Thailand. As some of them are Muslim-minority countries, it is up to individual companies to increase their respective market share.
Conclusion
While Takaful has proven its resilience during the pandemic, it must seize the opportunities in an increasingly dynamic risk landscape and sustain strong financial results despite a challenging economic environment.
Marcel Omar Papp is the head of Swiss Re Retakaful. He can be contacted at [email protected].