As with other economic sectors, COVID-19 has had a strong impact on the Takaful industry in Asia, leaving many unanswered questions about the sector’s full-year performance. Despite the difficult economic situation, the pandemic also revealed some positive effects such as a growth in awareness about the benefits of Takaful and the acceleration in digitalization.
Review of 2020
Looking back at the year, Malaysia’s General Takaful industry showed a positive growth of 0.6% in the first half of the year with a gross written contribution of RM1.64 billion (US$396.64 million) despite the pandemic.
However, the effects of COVID-19 are already visible — the industry grew 5% in the first three months of 2020, a result that eroded quickly over the next three months as COVID-19 took a hold. Compared with 2019, which showed a growth of 16.4% for the first six months, this year’s performance has significantly dropped. Whether the industry will be able to surpass 2019’s gross written income of RM3.31 billion (US$800.53 million) remains uncertain.
At the same time, the industry’s net claims incurred ratio in the first six months of 2020 has dropped by over 3% to 53.3%, from 56.6% in 2019. Again, the impact of COVID-19 is clear as the market loss ratio in the first three months of the year was still holding at 59.8%. Lower car traffic and people postponing medical treatment were some of the major reasons for the reduction.
As the situation normalizes, one can expect the loss ratio to increase again. On the other hand, the Family Takaful business in Malaysia has shown an impressive result with a 10.2% year-on-year increase. The growth was mainly driven by robust sales of investment-linked products, despite volatility in the capital market.
As performance data from other Asian Takaful markets such as Indonesia and Brunei are yet to be available, much remains to be seen whether they can maintain the growth momentum from previous years.
The Takaful industry has so far managed the pandemic well. A recent Swiss Re consumer survey revealed that a majority of the customers in Malaysia (84%) felt that their expectations with regards to claims were well met.
COVID-19 has undoubtedly accelerated the digitalization of the Takaful industry. Physical lockdowns and social distancing have led to greater consumer demand for an end-to-end online customer journey, from researching for information to purchasing policies and submitting claims through digital channels. One in two (51%) Malaysians were open to buying Takaful online, although agents and brokers still play a strong role, and similar trends are observed in Indonesia.
The pandemic has also led to a higher interest in Takaful, especially in medical, critical illness and family products In Indonesia, 42% of the consumers surveyed were willing to consider switching from conventional to Shariah insurance.
Aside from consumers, the pandemic has also led to a slowdown of regulatory activities as regulators refocused their efforts on maintaining the stability of the finance industry including Takaful. As a result, some regulatory changes, such as the second phase of liberalizing motor and fire insurance in Malaysia, have been postponed.
At the same time, some key initiatives such as the requirements to spin off Takaful in Indonesia by 2024 are still going ahead. Similarly, Bank Negara Malaysia has issued new regulations relating to climate change and sustainability in Malaysia.
One key initiative which continued despite COVID-19 is the preparation for the upcoming implementation of IFRS 17. The Malaysian Takaful Association has set up a working group together with consultants and other stakeholders to address implementation issues specific to Takaful. Regular industry forums were held and several guidance notes issued to support the industry’s transition.
Preview of 2021
While uncertainties remain about how economies and societies will recover in a post-COVID environment, four key themes have emerged as we look ahead to 2021:
1. Increased agility: To succeed in the ‘new normal’, Takaful companies will have to be more agile, adapting to change rapidly. Business continuity strategies such as work-from-home arrangements, shorter product development cycles and restructured distribution channels will play a key role.
2. Accelerated digitalization: Companies will need to ramp up their digitalization efforts to create a seamless and efficient customer experience to cater to an increasingly digital consumer market. It will also enable better access to new customer segments such as young consumers and the lower income class.
3. Higher awareness and demand: As consumer awareness of the benefits of Takaful grows, and with government budgets stretched to support recovery, the private sector can play a key role in supplementing protection provided by the public sector in the past.
4. Value-based Takaful: COVID-19 has reinforced the need to look more thoroughly at topics such as the enhancement of social resilience, community empowerment, sustainability and environmental protection. Having a value-driven agenda embracing these issues can further elevate the potential growth of Takaful.
‘Every cloud has a silver lining’ — it is up to the Takaful industry in Asia to optimize opportunities in the current situation to continue its growth in 2021.