Muhammad bin Ibrahim: Takaful industry at crossroads - a critical
examination
Remarks by Mr Muhammad bin Ibrahim, Governor of the Central Bank of Malaysia (Bank Negara
Malaysia), at the Takaful Annual Dinner and Awards 2018 "Takaful industry at crossroads: A
critical examination", Kuala Lumpur, 23 March 2018.
* * *
Just last year, I addressed the insurance industry. The day after, the newspaper headlines
screamed "insurance models broken". And so, I was more than a little surprised to receive an
invitation to speak. I could not resist it, and so I accepted.
This evening, I promise to be no less critical of the takaful industry. But take this well, as the path
to success begins with a critical examination of where we are today. We need to work as a
collective. And also bear in mind that the takaful's industry success is also our success.
Let us start by reviewing the industry's progress. Indeed, it has come a long way since its birth
over thirty years ago. Its 1% market share in 1990 is now around 15%. Net contributions have
grown 9% annually since 2010. These are achievements that we all should be proud of.
However, before we celebrate, let us consider three issues.
First, can the industry sustain the growth momentum as we move into the 21st century world of
technology and innovation. We have set ourselves an objective but we are far away from meeting
the target. The objective of 25% family takaful penetration by 2020 is admittedly, ambitious but
achievable. However, at the rate it is growing, we will only reach 16% in 2020, from the 14.8%
today. This would be even lower if we were to correct for double counting of policies. Clearly, the
data proves that takaful is still far below its full potential, and is nowhere near where it should be.
Second, individual takaful operators have not reached optimal size. Takaful operators are
dwarfed by their conventional counterparts. Without sufficient scale, takaful operators are
hampered in making meaningful inroads against their larger competitors. This is not just about
competition within the takaful and insurance industry, but also of technology. Technology is
reshaping the landscape of finance and lowering the barriers to entry from adjacent industries.
Takaful operators must shape up, or risk being marginalised, or worse, made irrelevant.
Third, the value proposition of takaful needs to be more apparent. As it currently stands, many
view it as being no different from insurance. Some even view it as being unnecessary.
It is disheartening to learn that 51% of respondents to a MTA survey cited these very reasons on
why they have little knowledge or interest in takaful products. The issue of misperception also
remains, with many non-Muslims deeming takaful as being only for Muslims.
Opportunity to reposition takaful for the future
This is the grim reality of the state of the industry, but it need not be so. In fact, I am positive
about the prospects and potential of takaful. However, to get out of this "predicament", we need
an immediate and radical change.
Takaful must shed its image as being an imitator, a follower or impersonator of conventional
insurance. Takaful operators, including the financial groups to which they belong, must see
beyond takaful as yet another line of insurance products. In this, we need the right leadership,
shareholders included, to set the right tone from the senior leadership that takaful must offer
distinctive benefits highly valued by all. Its impact must be lasting and profound. This is especially
so in our system, where takaful is competing side by side with the insurance industry.
All this considered, allow me to suggest three priorities for the industry to embark on to realise
the full potential of takaful:
First, fulfill the promise of takaful in helping protect people and businesses. Takaful is derived
from the Arabic word "kafal", which means 'to help'. To my mind, this calls for the industry to
reach out beyond its comfort zone of focusing on mandatory products, such as motor and fire, or
those that are easy to sell, namely mortgage related products. It must make serious inroads in
other areas where protection gaps exist, such as in agricultural risk, annuity and trade credit.
Something that is consistent with the needs of our economy. Ultimately, the industry must be
ahead of the curve to innovate and deliver solutions that are truly needed and highly valued by
customers, both individuals and businesses.
In family takaful, the industry must position itself as a trusted and valued solution provider for all
Malaysians. It must dispel the image of takaful as being an overly-complicated form of insurance
suitable only for Muslims. Market positioning should have broad appeal. Products should be easy
to understand and live up to public expectations of fair treatment, transparent and efficient
service.
In operational terms, this means using plain and simple language and always seeking to do what
is right for the customer, rather than only what is legally required. Over 50% of insurance and
takaful complaints that we received in 2017 were of mis-selling or misrepresentation.
Remember, when our staff or agents misinform or mistreat a customer, they harm the institution
and industry's reputation, undoing all the hard work that went into building the system that we
have today.
As a society we need to take care of our own, specifically for the B40 group. There is a lot of
work to be done. As at end-2016, insurance and takaful penetration in the B40 segment of
working age stood at 30.3%, compared with the overall penetration rate of 46.8%.
The roll out of affordable, accessible and easy to understand products under Perlindungan
Tenang is a start in meeting the needs of the underserved. Unfortunately, to date, only three
takaful operators have developed products under this initiative. Given the importance of financial
inclusion for the nation and takaful being a product with pseudo-social leanings, we should
expect much more from takaful operators.
Another area that is wide open for innovation is the integration of takaful with elements of waqf,
sadaqah and zakat to fund the provision of takaful coverage to the poor. I understand that a
microtakaful waqf product to help out those in the low income segment was launched a few
weeks back. I look forward to seeing more products such as these in the future. There is strong
potential for takaful to take the lead in solving development challenges facing the world, including
poverty and environmental degradation.
Takaful can also be the missing link for businesses. The potential is enormous just by looking at
the list of large infrastructure projects being undertaken. In Malaysia, just to name a few, there
are the two new MRT lines, the ECRL and the KL-Singapore High Speed Rail in the pipeline.
Internationally, there is the Belt and Road Initiative. All these entail large protection needs.
Capturing these opportunities would require much greater capacity to underwrite large and
specialised risks than currently exists in the industry today. This calls for greater retakaful
capacity. Given the absence of such retakaful operators, alternative arrangements for the
industry to come together to pool their capacity, expertise and business need to be seriously
explored.
We already have the essential ingredients - the presence of the world's largest global players in
our takaful market, deep Shariah knowledge within our domestic takaful and retakaful companies,
and an entire Islamic finance ecosystem that can be tapped into to really push the frontiers in
building retakaful capacity. We just need companies that are willing to lead the way. Building this
will take time, resources and a long term perspective, but this may be a small price to pay to
build scale, generate critical mass and position takaful as a credible solution for large and
specialised risks.
There is also a big opportunity in halal trade facilitation, especially in serving SMEs. The global
halal industry is valued at around USD2 trillion. The takaful industry however, has to be more
committed and visible in serving local and international halal businesses. After all, takaful has its
roots in the Nusantara, when Muslim merchants who plied their trade in the Far East centuries
ago were protected by early forms of takaful. This is why the takaful industry must join the
banking industry in participating at the upcoming Malaysia International Halal Showcase.
Participation will indicate intent, non-participation reflects poorly on the takaful industry, showing
the lack of commitment or ability to spot opportunities, or maybe even both. This certainly has to
be addressed if the industry is to make any meaningful progress, this sort of things matter.
Second, the takaful industry must conduct itself in a way that alleviates, not add, to the hardship
of customers. I would make this same remark to insurers and takaful operators alike, but with its
very essence of kafal emphasising mutual help and assistance, takaful must do more. Our
expectation is for the industry to consistently deliver best-in-class and superior customer
experience. It makes perfect business sense for positive customer experience to be at the heart
of the industry's strategy.
This is true for any business, but even more important for a product that most people do not
normally seek out to buy. McKinsey & Co. estimates that globally, insurers that consistently offer
best-in-class customer experience produce up to four times more growth in new business. They
are also 30% more profitable than those who do it inconsistently.
What the research underscores is the importance of being accessible, empathetic, fast and
reliable. Not just when selling, but also when providing after sales service and processing claims.
In this day and age, customers can hail a taxi ride in five minutes and have their food delivered in
30 minutes. Complaints on service are responded to within the same day, if not within minutes.
Quality and response to services are forever being transformed by technological advances. It is
thus unacceptable that service in the takaful industry is delivered slowly.
When I was finalising my speech, I was told by my staff that the average turnaround time to
process damage motor claims has increased by 10, from an already miserable record of 83
days. In the 19th century, Jules Verne wrote that anyone can travel around the world in 80 days.
We can't settle an insurance claim any earlier in the 21st century. Go figure.
My own experience suggests that the turnaround time is the most important aspect of takaful
operations that shapes the industry's image in the eyes of the customer. The industry has to
seriously look at this. It should relentlessly pursue changes in processes, rules and parameters
that are necessary to improve the experience for customers. This requires creativity and
persistence.
The situation is not much better in the family takaful business, although we are putting in place
the infrastructure to tackle this problem. The Bank, the insurance and takaful industry, and the
National Registration Department will roll out a new, automated mechanism this year to expedite
the process for claiming death benefits. With this, the industry will be better able to help those in
their hour of need.
The Bank, through the LIFE Framework and other initiatives, is determined to ensure that
customers receive a fair deal. The recent implementation of the balanced scorecard will increase
the professionalism of takaful intermediaries. It is now incumbent upon the industry to establish
and maintain trust and goodwill with its customers. Takaful operators have started publishing and
implementing new customer service charters. The industry must now walk the talk.
In the next few months, a Customer Satisfaction Index Survey will be carried out to measure
actual service levels against what operators promise. The results will be made public.
Customers can shop around and make better informed choices when deciding who to trust to
protect them.
In this digital age, technology has changed the way we live, the way we save, and the way we
bank. But it seems that little has changed in the takaful and insurance space. This perplexes me.
This is quite telling from the industry's attitude towards efficiency and innovation more generally.
Mobile and internet penetration in Malaysia stand at about 132% and 81% respectively. There is
potential to increase the offering of supplementary services online, such as vehicle anti-theft
services and health advice, as a recent study by Bain & Company on insurance customers in 19
countries confirms. The industry can invest in its own capacity to deploy new technological
solutions itself, or it can partner with others.
The point is that it has to respond proactively, or risk being disrupted by others. Just a few weeks
ago, Amazon, Berkshire Hathaway and JPMorgan announced a new venture to disrupt health
insurance in the U.S. This is the reality that the industry has to face.
Another issue that the industry is lagging behind is in terms of migration to e-payments. The use
of cheques is still prevalent. In 2017, insurers and takaful operators issued 1.5 million cheques
while 5.7 million were collected from customers. This is a huge number. Cheques are very
costly, inefficient and obsolete.
If the industry does not respond to these challenges, then others will. Over the past year, the
Bank has allowed financial product aggregators to offer insurance and takaful products on a
nonadvisory basis under the Regulatory Sandbox. These platforms allow consumers to easily
compare and assess product offerings, thus increasing the visibility of insurance and takaful
products and supporting our objective of digitalising insurance and takaful distribution.
The Bank is close to finalising changes to the regulatory framework that will enable online
product aggregators to operate with broad access to the insurance and takaful market by the end
of this year. This is a game-changing initiative that will pave the way for a more contestable
insurance and takaful market going forward, ultimately improving access and choice for
consumers.
For the industry, it offers the potential to open up new market segments that were previously
untapped, particularly younger millennials, and lower the cost of bringing new products to the
market.
Third, the takaful industry has to have the right people with the right competence. Strong
leadership and quality talent are needed to steer the industry forward to reach greater heights.
Let us start from the top with each company's leadership - shareholders, the board and senior
management. For the industry to really break new ground, we need to consider a total
reimagination of the takaful model. It needs to break out of the shadows of insurance by evolving
new business and operating models.
Concepts in takaful with rich potential, such as mutual takaful remain largely untested. The
mutual model has a long history. It is also enjoying a resurgence with the rise of new online,
peer-to-peer insurers in other countries. This is just one model. There might be others. Boards
and senior management should lead the way in exploring these developments and charting new
territory. This will require more active engagement of shareholders to develop a clear vision for
the company and enlist support for bold strategies that will change the status quo for the better.
Various programmes such as FIDE and FIDE Forum already include content to help prepare
directors in future proofing their institutions. The focus will be even stronger going forward. We
are also pleased to announce that a specialised executive Islamic finance education programme
tailored for directors of Islamic banks and takaful operators will be launched in the first half of this
year.
It will equip directors with an appreciation and knowledge of Islamic finance by incorporating
practical business perspectives. With this, directors are better able to contribute towards growth
and innovation, beyond their roles in ensuring that their institutions operate within sound Shariah
and risk management parameters.
At the level of employees, the reality is that good talent is in short supply. And so, the industry
must take a longer view in its human capital strategies. It must invest to develop talent.
Remuneration that is competitive is one part of the solution. Sadly, the remuneration of
employees of takaful operators is not competitive. Among highly skilled employees, we estimate
that those in the takaful industry earn 15% less than those in insurers. So long as this difference
exists, it will not be the employer of choice for the best talent.
The other part of the solution is in building skills and competencies. The industry needs to take
this seriously if it wants to break new ground in realising the potential of takaful. Takaful operators
must set a clear vision and culture of continuous learning and development.
Programmes such as the Chartered Professional in Islamic Finance, Certified Shariah Advisor
and Certified Shariah Practitioner play an important role in elevating the technical and ethical
standards of the takaful workforce. The industry needs to get behind these standards and invest
in upskilling employees across all levels, starting with those in key senior roles. This can take the
form of sponsorships for professional qualifications, alignment of incentive systems and
development pathways for staff.
Agents are also an important component of the takaful eco system. Many of the imperatives that I
mentioned earlier are also applicable to them. In particular, professionalising the agency force is
a priority. The life insurance industry association is already taking steps to require agents to be
accredited by the Financial Accreditation Agency. I hope to see MTA doing the same, and being
proactive in providing the support and resources for its implementation.
Moving forward, Bank Negara Malaysia, will further lay the groundwork to strengthen the industry.
This includes creating an environment that fosters innovation, facilitated by the revised Takaful
Operational Framework which will be published for consultation before the middle of the year.
The revised framework will bring greater clarity on the use of multiple Shariah standards in the
models and structures of takaful. We will also strengthen the governance of takaful operators,
including how takaful funds are managed, to further safeguard the interests of takaful
participants. An exposure draft will be published before the middle of the year, and the industry
and public are welcomed to provide feedback.
Conclusion
Before I end, let me briefly touch on the developments with regards to the Malaysian economy.
The domestic economy grew strongly, by 5.9% in 2017, supported by the global growth upswing
and robust domestic demand. Domestic demand remained central to Malaysia's growth,
grounded on healthy income and labour market conditions.
This is not the fruition of just one year's effort. It is a reflection of the successful structural
changes undertaken over the last two decades. Malaysia's shift towards a domestic
demanddriven economy and continuous economic diversification have placed us in a very good position
to adapt to and leverage on the changes in the global economy.
Another transformation that has taken place in the past two years is the increased sophistication
of the onshore financial and foreign exchange market. The introduction of the Financial Markets
Committee (FMC) measures has put in place the foundation for a healthier and more vibrant
financial and foreign exchange market.
As a result of the strong economic performance in 2017 and the improved sentiments following
these measures, the ringgit has strengthened by 14.6% in 2017 and 2018 thus far. The ringgit
has also been of the most stable currency in the region. As our economic outlook remains
strong, the ringgit will continue to reflect this strength.
For Bank Negara, we have always indicated that market forces will determine the value of the
ringgit. There has never been a target level for the ringgit exchange rate. With the economy and
financial markets constantly evolving, fixation on a particular level of ringgit exchange rate is
counterproductive, if not detrimental to the economy.
What matters for Bank Negara and all of us here is to ensure that any adjustments taking place
is done in a gradual and orderly manner, without causing undue disruptions to businesses and
households. The foreign exchange market can sometimes be very fickle. Therefore, we should
always remain on our guard, as the global economic and financial conditions may change rapidly
following many developments such as normalisation of interest rates, geopolitical risks and the
tendency to adopt policies that might curtail open trade.
The ringgit's recent appreciation and stability is not something that we should take for granted.
What we have learnt in recent years is to never downplay the unexpected. The rapid decline in
global oil prices, drastic disruptive policy shifts in major economies, and the more recent
increase in trade tensions are prime examples of tail-risk events that will continue to affect our
economy and the ringgit.
Similar to the Malaysian economy, while we have witnessed progress and growth of the
Malaysian takaful industry, moving to the next level requires us to move away from status quo
and to do things differently.
Therefore I urge the industry to not waste any more time in thinking anew and strengthening its
capacity to play a much more meaningful role in supporting sustainable and inclusive economic
growth. Let us all be committed to realise the values that are fundamental to the benevolent
mission of takaful.
I would like to take this opportunity to congratulate tonight's award winners. I am confident that
such recognition will motivate you and all parties to continue to contribute and strengthen the
growth of the takaful industry.
Thank you and enjoy the rest of the evening.