MALAYSIAN ISLAMIC FINANCE Issuers and Investors Forum 2006

Growth of Takaful and re-Takaful

To open this session, the CEO of NTUC Income Tan Kin Lian stressed that Takaful was basically a re-statement of what conventional insurance was in the early days, when it was largely operated as a mutual scheme. The key difference was that in the past two decades, conventional insurance had moved too much into the profit-oriented model. He added that conventional insurance now operated with the aim of getting “maximum shareholders’ value” and a high rate of return on the capital provided by the shareholders.

Meanwhile, Sohail Jaffer of FWU Group noted that Takaful had a strong affinity to community banking and was an extension of the conventional wealth industry, based on socially responsible investment principles. According to him, the total premium collected was around the US$3 billion (RM11 billion) to US$4 billion (RM14.7 billion) mark and had the potential of growing to US$10 billion (RM36.74 billion).

However, according to his data, the Takaful industry was dominated by non-life products. To entice a bigger market, industry players should focus on customer convenience and the products should be easily understood and transacted without being overly engineered. “It has to be simple and directly related to the consumers’ needs,” he reiterated.

One of the challenges facing the industry was to make Takaful products available to the public at large, regardless of their religious beliefs. Using Malaysia as an example, he said that here Takaful products are also sold to non-Muslims.

Another challenge was to be able to cross borders in order to widen the market, Sohail said, adding that most of the players had been merely three to five years in existence and were still struggling to establish their brands. “Brand recognition is important, that needs to be built up, to make the products successful,” he added.

In answering the question of how to make Takaful products appealing to non-Muslims, Keith Driver of HSBC Takaful pointed out two important issues, namely creativity and education. In offering products, players must be creative to entice subscribers to their products by using distinguishing features. For instance, he added, Takaful products were still limited from an investment point of view. More importantly, he said, customers must be adequately educated in order for the products to be sold.

Elaborating on the development of products, Kin Lian shared his experiences with the Singapore-based co-operative insurance company. He said key features stressed in most of the products were simplicity, transparency and fairness. The product must be simple to enable the customers to understand. He pointed out that once customers understood the products and how they could benefit from them, customers would look for more of those products, thus reducing operational costs, based on economies of scale.

Adding to the simple, transparent and fair features suggested by Kin Lian, Sohail said price competitiveness was an equally important feature for Takaful products. He said players had to attractively package the product and make it more “bankable.” By “bankable,” Sohail said Takaful products should be made as easy to use as other banking products, such as getting a loan or applying for a credit card.

Meanwhile, Jeremy Camps of JCC Re-Takaful Malaysia said the re-Takaful business should be more profitable, as the operations were based on a pool of funds and the community should therefore be interested, if the fund worked and the company received the returns back.

However, in managing a Takaful pool where the contract could run for several decades and there was a high degree of uncertainty, Kin Lian said such an arrangement could lead to a conflict of interest between the shareholders and the policyholders. The Takaful operator has to be remunerated for its services in a transparent and fair manner, he pointed out, noting that Takaful placed more emphasis on the mutual concept of sharing of risks and the need for transparency and fair treatment of all the participants, including fair remuneration for the operator.

In strategizing itself to be a Takaful and re-Takaful player to be reckoned with, Kin Lian said NTUC Income was building a new platform to do business in Singapore and beyond, called “the Insurance Cooperative of the Future.” He explained that this platform had the following key components: the right products – simple to understand, meet customer needs, low administration costs; a new way to market the products; educating potential customers about insurance; and distributing the products through multi-channels with the effective use of the internet.

“An efficient back-end system to administer the business is also important,” he said, concluding that NTUC would promote the principles of Takaful as the basis for the growth of the business in a fair and transparent manner.