One of the main challenges of Takaful is that you have a limited investment scope, in that you have to invest in Shariah compliant assets, and this is further exacerbated by the current challenging investment environment.
Availability of assets has always been a challenge to the industry and one question that remains is that can the amount of available Shariah compliant assets keep pace with an industry set to maintain its 27% year-on-year growth trajectory?
Matching a booming sector with the necessary assets is always going to be a challenge, especially with the additional Shariah compliant layer. Zainudin Ishak, the CEO at HSBC Amanah Takaful admits that “the market is still jittery and challenges remain going forward”.
However, investments in relation to Takaful are ultimately part of the operator’s risk. Risk is an inherent aspect of any insurance business. However, when referring to Takaful, we have to consider a purer level of risk in the level of speculation on investments. However, there is a human hand behind any form of investment that dictates the overall outcome of any decision.
Despite these trying times, the industry has remained relatively sheltered from the current global economic crisis. According to Zainudin, the back drop of investment returns in Malaysia is fairly straight forward as “we have government issuances that offer reasonable returns of 3.8% per annum, private debt securities which yields are in between the 4%-5% range and so far we have not had to deal with any significant change in the default risk and therefore it is still viable to price Takaful product in this market”. His main concern remains on the viability of the tenors and matching of asset allocations.
Zainudin explained that on his side he chooses to focus on the proposition, as a means basis rather than on any specific return but added that “growth and profitability are still attainable in this challenging financial climate”.
Mohamad Damshal Awang Damit, the managing director at Amundi Islamic Malaysia, commented that from an asset management point of view, investment strategies are in turmoil adding that, “if you look into Takaful, getting a yield from an asset is proving extremely challenging, especially following the crisis. In a situation where US dollar liabilities are yielding less than 2%, how do you immunize yourself from such a situation?
Mohamad Damshal further pointed out that it is possible to achieve an optimization of assets through active management rather than adopting a strategy of ‘buy to hold’ adding that after the subprime turmoil, we are experiencing a ‘new normal’. Takaful is a very specialized investment, and you need to invest your liabilities and as a result the Takaful players buy to hold.
“This needs to take place through the active portfolio management and trade. This was the market will be able to more accurately reflect the underlying economy.
By bringing in other asset classes, you can help bridge this divide. The current solution might be that in order to ride out the impact of the current crisis, you might want to look beyond the conventional and look at equity and use higher premiums to compensate for the risk. The key is creating vibrancy in the market,” said Mohamad Damshal. – SW