APRIL 2011

Special Report
For the
6th Annual World Takaful Conference 2011
Dubai, UAE
..………….………………………………………

Taking Takaful to the next level:

The Malaysian Experience
Analytical Contacts:

Islamic Ratings …in this issue

Mohamed Zakariya Othman
Head
(603) 7628 1018 The success story of the Malaysian Takaful industry
zakariya@ram.com.my

Zusuff Kan Zainal Kan

Analyst RAM Ratings’ approach in Takaful rating
(603) 7628 1182
zusuff@ram.com.my

Amir Shazlan Kamarudzaman

Research Associate
(603) 7628 1168
shazlan@ram.com.my
 6th World Takaful Conference 2011
The success story of the Malaysian
Takaful industry
Introduction
T
he Islamic finance industry in
Malaysia continues to boom
at a fast clip, supported by
the conducive environment where pioneers
have taken Islamic finance to the next
level in terms of product innovation as well
as financial and regulatory infrastructure.
Notably, Islamic banking has been thriving
on the back of the ongoing liberalisation of
the Islamic finance sector; the growth is
clearly evident from the increasing number
of full-fledged Islamic banks, including
several foreign-owned entities. While not
as prominent as the Islamic banking
segment, Takaful1 is marching ahead at
its own pace, with a year-on-year growth
rate of 20%-26% in terms of total assets
and contributions between 2004 and
20092.
Islamic finance has evolved from just a
single player offering limited basic
products into a viable industry that has
been successfully integrated into the
mainstream financial system. This has
been achieved through the concerted
efforts of Bank Negara Malaysia (“BNM”)
and the Takaful operators in developing a
dynamic, resilient and efficient Takaful
industry.
In developing the domestic Takaful
industry, BNM has adopted a gradual
1
In theory, Takaful is based on the law of large
numbers. The term Takaful stems from an Arabic word
that means “guaranteeing each other”, and is based on
a system of ta’awun (mutual assistance) and tabarru’
(gift, donation), whereby the risk associated with it is
voluntarily shared among a group of people.
2
Extracted from the key note address by Mohd
Razif bin Abd Kadir, Deputy Governor of Bank
Negara Malaysia.
Special Report – Taking Takaful to the next level: The Malaysian Experience
RAM Ratings
approach that can be segmented into 3
phases:
• Phase I (1984-1992) had
started with the enactment of a dedicated
law, i.e. the Takaful Act 1984 (Act), and
the establishment of the first Takaful
operator in 1984. The primary focus during
this period had been the establishment of
the basic infrastructure for the industry.
This Act, which is still in force, had been
enacted to govern the conduct of Takaful
business and requires the registration of
Takaful operators. It also provides for the
establishment of Shariah committees to
ensure that the business operations of a
Takaful operator are always in compliance
with Shariah principles.
• Phase II (1993-2000) marked
the introduction of competition with the
entry of another Takaful operator. This
period had also seen greater cooperation
among Takaful operators in the region,
including the formation of the ASEAN
Takaful Group in 1995 and the
establishment of ASEAN Retakaful
International (Labuan) Ltd in 1997. This
had facilitated retakaful arrangements
among the Takaful operators in Malaysia
and the region, i.e. Brunei, Indonesia and
Singapore.
• Phase III (2001-2010) had
begun with the introduction of the
Financial Sector Master Plan (or FSMP) in
2001. Among other objectives, this had
been to enhance the capacity of the
Takaful operators and to strengthen the
legal, Shariah and regulatory frameworks.
The section of the FSMP that relates to
Islamic banking and Takaful is a road map
1
 6th World Takaful Conference 2011

Figure 1: Development of Takaful Industry in Malaysia

• The enactment of a dedicated regulatory law, the Takaful Act 1984, to govern the conduct of Takaful
Phase I business, and provide for the establishment of Shariah Committees to ensure that the business
operations of a Takaful operator are in compliance with Shariah principles at all times.
1984-1992
• The establishment of the first Takaful operator in 1985.
• The primary focus was the establishment of the basic infrastructure for the industry.

• The introduction of competition with the entry of another Takaful operator.

• Greater competition among Takaful operators in the region, including the formation of the ASEAN
Phase II
Takaful Group in 1995 and the establishment of ASEAN Retakaful International (L) Ltd. in 1997.
1993-2000
• Takaful Malaysia and Takaful Nasional (now known as Etiqa Takaful) jointly developed a Code of
Ethics for the industry in 2000.

• Introduction of the Financial Sector Master Plan in 2001, which objectives include enhancing the
capacity of the Takaful operators and strengthen the legal, Shariah and regulatory framework.
• Takaful Malaysia and Takaful Nasional launched an initiative in 2001 with the Life Insurance
Association of Malaysia to promote best practices and greater professionalism in the industry.
• An increased pace of development and competition with the licensing of new operators.
• The Malaysian Takaful Association was established in 2002 to further promote the development of
Phase III
the Takaful industry.
2001-2010
• Liberalisation of the Takaful industry in 2009, which saw the issuance of four new family Takaful
licenses in 2010 to players that can offer significant value proposition to Malaysia to spur the
development of the industry.
• Given the push for the introduction of more stringent capital requirements, Malaysia has extended
the discussion on risk-based capital (RBC) to Takaful. The RBC approach is expected to be
implemented in 2011 or 2012, which will help to enhance the industry's capital base.

Source: BNM, KFHR

towards realising the nation’s aspiration of
becoming an international centre for
Islamic finance. To date, the pace of
development has picked up while
competition has increased with the
licensing of new operators. To further
promote the development of the Takaful
industry, the Malaysian Takaful Association
(“MTA”), an association for Takaful
operators, was established in 2002. The
MTA aims to improve industry self-
regulation through uniformity in market
practices and by promoting a higher level
of cooperation among the various players
vis-à-vis developing the industry.
Commercially driven Takaful operations in
Malaysia have contributed significantly to
the success of the industry. This approach
emphasises the provisions of reasonable
returns to the participants, the Takaful
operator and its shareholders. It differs
from the cooperative Takaful concept
adopted by some jurisdictions, where the
Takaful scheme is operated purely for
social purposes.
Trends and performance
Malaysia has the largest Takaful market in
world, with an estimated 26% of global
Takaful assets valued at RM12.4 billion3.
Nonetheless, Takaful assets only
accounted for 8% of the aggregate assets
of the Malaysian insurance and Takaful
industries in 2009 (2005: 5.7%; 2008:
7.5%). On the other hand, Takaful funds
more than doubled from RM5.9 billion in
2005 to RM12.4 billion in 2009. In
3
Source: BNM

Special Report – Taking Takaful to the next level: The Malaysian Experience 2
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 6th World Takaful Conference 2011

addition, net Takaful contributions Chart 2: Total Assets vs. Market

augmented from RM1.3 billion to RM3.5 Share (Malaysia)
billion over the same span. Overall, the Takaful: Total Assets vs. Market Share (Malaysia)

Malaysian Takaful industry has been 16,000 10.00

8.00
charting steady annual growth in terms of 12,000

RM million
6.00
assets and contributions, averaging at 8,000
4.00
%

about 20%-26% between 2004 and 2009. 4,000

2.00

0 0.00
2004 2005 2006 2007 2008 2009
Chart 1: Total Takaful Contribution
Total assets Market share (RHS)
Total Takaful Contribution (2015F)
Source: BNM
Asia-Pacific, Europe,
42.0% Turkey,
China & Chart 3: Per Capita Contribution
India,
31.0% (Family Takaful)

GCC, 27.0%

Source: Salama Arabic Islamic Insurance Company,

KFHR

Product-wise, Takaful has evolved via

product development and innovation.
Takaful operators in Malaysia and the Source: BNM
Middle East offer competitive policies in
relation to coverage and features Chart 4: Per Capita Contribution
compared to those provided by (General Takaful)
conventional insurance companies.
Typically, Takaful operators derive their
business from 2 main products: general
and family Takaful4. In comparison to the
early days, e.g. when general Takaful
products had constituted 63% of net
contributions in 1984, family Takaful
products have now become the prime
business of Takaful companies in Malaysia,
boasting a market share of 78%. Source: BNM

Regulatory Environment

A major force behind the domestic growth

4
General Takaful – which includes motor and fire
Takaful - provides short-term protection, normally 1
year. More specifically, it provides protection against
property loss or damage, liabilities arising from damage
caused by the insured to a third party, and accidental
damage or injury to a third party. Family Takaful, on the
other hand, offers a combination of protection and long-
term savings usually spanning more than 1 year. Family
Takaful includes individual, mortgage, credit and group
plans; risks covered are in the areas of premature
death, illness, and regular income during retirement.
of Takaful and its success is the
Government’s strong backing. The
country’s established regulatory and legal
frameworks have given it a clear edge
over other jurisdictions. Takaful operations
have been regulated and supervised by
BNM since 1988, with the appointment of
the Central Bank’s governor as the
director-general of Takaful.

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 6th World Takaful Conference 2011
Meanwhile, the industry’s strong Shariah
framework helps nurture consumer
confidence and also provides greater
flexibility to Takaful operators, encouraging
them to be innovative within the
boundaries of Shariah.
The Shariah framework has been
continuously enhanced, to be in line with
the development of the Takaful industry as
well as to ensure the uniformity and
harmonisation of Shariah rulings. As the
next component of Malaysia’s Islamic
Finance Master Plan and part of BNM’s
ongoing review of policies relating to
Shariah governance for Islamic financial
institutions in the country, the Central
Bank has issued the Shariah Governance
Framework (or SGF); this is to inculcate a
higher degree of accountability,
understanding and commitment on
Shariah governance among the key
stakeholders within such institutions.
The SGF has replaced the 2004 guidelines
on the governance of the Shariah
committee for Islamic financial institutions.
The SGF outlines BNM’s expectations on
Islamic financial institutions’ Shariah
governance structures, processes and
arrangements – to ensure that all
operations and business activities are in
accordance with Shariah principles. Given
the rapid development of Islamic finance
through the years, the SGF aims to
strengthen the Shariah governance
process, decision-making, accountability
and independence of Shariah advisory
bodies. In this regard, the SGF provides
comprehensive guidance on the roles and
responsibilities of the Shariah committee
and management of Islamic financial
institutions, to ensure that their operations
are in compliance with Shariah laws.
Under the SGF, a Shariah committee is
accountable for all its decisions, views and
opinions related to Shariah matters. It has
Special Report – Taking Takaful to the next level: The Malaysian Experience
RAM Ratings
the responsibility of implementing the
management’s decisions and opinions
throughout the Islamic financial institution.
The SGF also requires Islamic financial
institutions to establish 3 functions that
provide a system of checks and balances
within the organisation, including the
following:
• Shariah risk-management control
that is able to identify all possible risks of
Shariah non-compliance and, where
appropriate, remedial measures to
manage such risks.
• A Shariah review that continuously
assesses the Shariah compliance of all
activities and operations on an ongoing
basis.
• An annual Shariah audit to provide
an independent assessment of the Islamic
financial institution’s adequacy and
compliance with the established policies
and procedures, and the adequacy of the
Shariah governance process.
Effective implementation of the SGF will
instil further confidence among the
stakeholders and elevate the domestic
Islamic financial industry’s level of
integrity.
Takaful operators are also required to
comply with a number of guidelines and
circulars issued by BNM on various areas
(as listed below). These safeguard Takaful
funds, to ensure that they are not depleted
through improper use or unsound
investments.
• Guidelines on Operating Costs of
Family Takaful Business – impose limits to
control acquisition costs, improve the
operational efficiency of Takaful operators
and to provide better value for
participants’ contributions.
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 6th World Takaful Conference 2011

Table 1: Regulatory Overview

Do es regulatio n
Takaful Separate
allo w sharing in
Co untry Regulato r windo ws Takaful Regulatio n
underwriting
allo wed? regulatio n?
surplus?
B ank Negara M alaysia
M alaysia × √ √ Takaful A ct 1984
(www.bnm.go v.my)
M inistry o f Finance
B runei × √ √ Takaful Order, 2008
(www.mo f.go v.bn)
Securities and
P akistan Exchange Co mmissio n (×) × √ Takaful Rules 2005
(www.secp.go v.pk)

Labuan Offsho re Financial Guidelines o f Takaful and Internatio nal

Labuan Services A utho rity √ √ × Retakaful B usiness in IOFC
(www.lo fsa.go v.my)

Central B ank o f B ahrain × Insurance Rulebo o k Vo lume 3-Insurance

B ahrain √ √
(www.cbb.go v.bh) (fo llo ws A A OIFI)

The Qatar Financial Insurance Rulebo o k,

Qatar Center Regulato ry A utho rity √ × (×) Chapter 6: A dditio nal requirements fo r
(www.gfcra.co m) Takaful Entities
Law o n Supervisio n o f Co o perative
Saudi Saudi A rabian M o netary A gency Insurance Co mpanies and its Implementing
× √ √
A rabia (www.sama.go v.sd) Regulatio n

M o netary A utho rity

Singapo re o f Singapo re √ √ × Insurance A ct
(www.mas.go v.sg)
Insurance Superviso ry
Sudan A utho rity o f Sudan × √ √ Insurance and Takaful A ct 2003
(www.cbo s.go v.sd)
United Financial Services A utho rity
√ √ × Financial Services and M arkets A ct 2000
Kingdo m (www.fsa.go v.uk)

M inistry o f Finance Law o f the Republic o f Indo nesia No 2/1992

Indo nesia √ √ √
(www.depkeu.go .id) and Go vernment Regulatio ns

United A rab Dubai Financial Services A utho rity ×

√ × DFSA Rulebo o k
Emirates (www.dfsa.ae) (fo llo ws A A OIFI)

Source: Munich Retakaful

management committee. In addition,

• Guidelines on Claims-Settlement Takaful operators are required to observe
Practices – specify the minimum standards the prudential limits and conditions
for prompt and fair payment of claims, and imposed on the outsourcing of the
also ensure that claims are paid in a timely management of Takaful funds - to
manner. ascertain that the funds are properly
managed within the accepted risk-
• Takaful (prescribed Financial management framework.
Institution, Loan and Investments)
Regulations 2003 – specify the investment Takaful operators in Malaysia are also
avenues for the assets of Takaful funds, to subject to circulars and guidelines, to
ensure a balance between profit ensure proper disclosure and enhance
maximisation and prudent management of transparency for the various stakeholders.
such money. By providing the relevant information in a
timely manner, all stakeholders can
To ensure the effectiveness of overall effectively play their roles in ensuring
management, Takaful operators are prudent management of the Takaful
required to observe the Guidelines on business.
Directorship for Takaful Operators, which
govern the appointment of directors and • Guidelines on Prohibition Against
chief executives and the setting up of Unfair Practices in Takaful Business –
board committees, including the risk-

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 6th World Takaful Conference 2011

promote sound business practices and fair performance of the Takaful operators,
treatment of consumers, by ensuring enabling BNM to analyse the financial data
equitable contractual terms and conditions. and to detect any deterioration in their
There is also a specific restriction against financial conditions.
misrepresentation on Takaful plans.
The lingering challenge for
• Guidelines on Financial
Takaful
Statements for Takaful Operators –
enhance disclosure and transparency in
The Malaysian Takaful industry has been
financial statements. These guidelines also
experiencing steady growth over the last 5
assist the various stakeholders in
years. Compared to its conventional
evaluating and assessing the financial
counterpart, however, it still lags far
positions and performance of the Takaful
behind in terms of penetration and market
operators.
share. Despite the clear growth of this
industry, both domestic and global, there
Table 2: List of Takaful Operators in
are still concerns and challenges that may
Malaysia
hinder Takaful operators’ efforts to become
No Operators
prominent players in the financial realm.
Takaful
1 CIMB Aviva Takaful Berhad Although certain issues are still prevalent –
2 Etiqa Takaful Berhad e.g. deliberation on the ”perfect” Shariah-
3 Hong Leong Tokio Marine Takaful Berhad compliant contracts as well as the costs of
4 HSBC Amanah Takaful Malaysia Takaful distribution channels and
5 MAA Takaful Berhad infrastructure - the lingering concern
6 Prudential BSN Takaful Berhad
involves liquidity; Takaful operators need
7 Syarikat Takaful Malaysia Berhad
8 Takaful Ikhlas Sdn. Berhad
to match their long-term liabilities with
9 Great Eastern Takaful Sdn. Berhad their long-term assets to expand their
10 AIA AFG Takaful Berhad array of products and business
Retakaful propositions.
1 MNRB Retakaful Berhad
Munchener Ruckversicherungs - Gesellschaft
2 The need for long-term sukuk is
(Munich Retakaful Malaysia)
fundamental to resolving this issue.
3 ACR Re Takaful SEA Berhad
Swiss Reinsurance Company Ltd. However, the lack of opportunities for
4
(Swiss Re Retakaful) Takaful operators to capitalise on long-
International T akaful Operator term sukuk to complement their products,
1 AIA Takaful International Berhad such as long-term annuities, has
Source: BNM, MIFC
hampered the deployment process for
Note: BNM has issued 4 new family Takaful licenses
in 2010. The table above only includes Great annuity-type assets. In this respect, asset
Eastern Takaful Sdn. Berhad and AIA AFG Takaful allocation for Takaful companies remains a
Berhad as the remaining 2 have yet to commence
challenge; without long-term sukuk, the
operation.
full potential of the Takaful industry cannot
be realised.
• Takaful Operators’ Statistical
System – enhances the quality and
timeliness of financial reporting by Takaful
operators, by enabling them to submit
their monthly and annual data to BNM via
an online web-based system. It facilitates
comprehensive reporting on the financial

Special Report – Taking Takaful to the next level: The Malaysian Experience 6
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 6th World Takaful Conference 2011
Figure 2: Changes in Malaysia’s Takaful industry
Access to long-term sukuk has been
elusive for Takaful companies, particularly
family Takaful and retakaful operators. As
an alternative, the investment vehicles
used to invest policyholders’ funds or
contributions are parked under short- to
long- term investments, including quoted
shares (30%), unit trust funds and
Source: BNM, KFHR
financing (20%), property (20%),
government investment certificates
(20%), and levy freedom (5%), all of
which are under the purview of the Central
Bank and based on its guidelines as well as
the Takaful Act 1984. The percentage of
their allocation may be revised from time
to time during each investment period.
The lack of long-term instruments has
often been cited as the chief constraint
against the industry’s growth. While
various sukuk structures exist and
Special Report – Taking Takaful to the next level: The Malaysian Experience
RAM Ratings
medium-term sukuk with tenures of 6-10
years are available, Takaful and insurance
companies have to compete against banks
that absorb most of these issues. As at
end-February 2011, banks made up
89.6% of the primary subscribers in the
sukuk market, with Takaful and insurance
operators accounting for a mere 3.9%.
Although there are long-term sukuk –
albeit limited - with tenures of 21 years
and above, most (58.8%) of them span 6-
10 years.
Despite the availability of long-term sukuk,
banks still dominate the sukuk market.
Key considerations apparent in this respect
would be the avenue in lobbying primary
issuers for access to sukuk as well as the
depth of Islamic capital market
instruments. A main issue that persists
within the realm of Islamic finance is the
7
 6th World Takaful Conference 2011
lack of liquidity in the Islamic capital
market, which is also one of the dilemmas
that Takaful operators face. In this sense,
the secondary market for Islamic
instruments lacks certain key features,
such as appropriate tenures for the
efficient functioning of the debt market.
The shortage of suitable sukuk
investments for Takaful and other
companies testifies to the dearth of
liquidity within the sukuk market.
Apart from inadequate liquidity and market
depth, the number of participants in the
Islamic capital market – although
increasing - is still relatively small. This
may coincide with the limited choice in the
types of assets that can be used as
collateral and the lack of awareness on
Islamic financial instruments. Crucially for
Takaful companies and investors, “investor
awareness” sessions on sukuk can be
regularly conducted, to encourage both
investors and Takaful operators to invest
in these Islamic instruments. In the
meantime, lack of awareness on the part
of Takaful operators also hinders the
growth of the Takaful industry, as diverse
of investor groups with different
perspectives and liability structures are
necessary for the long-term viability of the
Islamic capital market’s liquidity levels.
From the issuer’s perspective, sukuk can
provide a stable source of funding. Takaful
operators and other entities may become
regular sukuk issuers and could
consequently elevate the volume of new
sukuk. This would provide Takaful
companies with a wider range of
investments and assets to match their
long-term liabilities and, ultimately,
contribute to the growth of the Takaful
industry. Takaful companies have
predictable funding flows and liabilities for
an extended period. As such, they have a
long-term planning horizon and will need
long-term assets that generate a stable
flow of real income. They would also be
Special Report – Taking Takaful to the next level: The Malaysian Experience
RAM Ratings
aided by the establishment of a systematic
programme of sukuk issuances throughout
the maturity spectrum, with the requisite
conditions and sizeable auctions conducted
at regular intervals covering a broad range
of available maturities.
At the other end of the spectrum, Takaful
operators can provide a source of reliable
demand for both primary and secondary
sukuk issues. Islamic finance is still
considered in its infancy stage. If sukuk
funds expand in line with stronger
demand, this will have a positive effect on
the primary market. By enhancing liquidity
in the secondary market, the price levels
of sukuk may be lowered as the premium
demanded by investors in return for the
illiquidity of the Islamic capital market is
reduced, thus providing greater access to
the sukuk market. Despite the lack of
investment diversification for Takaful
operators, the growth of the Takaful
industry will be supplemented by
Malaysia’s 10-year development plans,
which could spur the creation of more
sukuk with longer tenures as companies
will inevitably need to spread out their
financing requirements.
Moving forward
The Takaful business has bright growth
prospects, with opportunities arising from
the existing circumstances. Firstly, the
demographic changes among the country’s
population, where life expectancy is
increasing, resulting in an enlarging ageing
base (the Malaysian life expectancy is 71.8
years for males and 76.3 years for
females). The birth rate, although
declining, is consistently higher than the
world average (18.7 live births per 1,000
of the population). The rising costs of
higher education and dwindling financial
assistance for educational purposes
compel consumers to set aside funds to
support their offspring’s educational needs.
Healthcare costs are also on the rise. The
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 6th World Takaful Conference 2011

Figure 3: IFSB Governance for Islamic Insurance (Takaful)

Reinforcement of relevant good governance

Principle
1.1
practices as prescribed in other relevant Manage a comprehensive governance framework
internationally recognised governance
Part I standards for insurance companies, while
addressing the specificities of Takaful

Principle
1.2
undertakings Adopt an appropriate code of ethics and conduct

Have in place an appropriate governance structure

Principle
2.1
that represents the rights and interest of Takaful
A balanced approach that considers the participants
Part II interests of all stakeholders and calls for
their fair treatment Adopt and implement procedures for appropriate

Principle
2.2
disclosures that provide Takaful participants with
fair access to material and relevant information

To ensure that they have in place appropriate

Principle
3.1
mechanisms property to sustain the solvency of
An impetus for a more comprehensive Takaful undertakings
Part III prudential framework for Takaful
undertakings Adopt and implement a sound investment strategy

Principle
3.2
and prudent manage the assets and liabilities of
Takaful undertakings

Source: IFSB, KFHR

cooperation with Islamic financial

higher-income group may have financial
institutions such as the Pilgrimage
planning to meet their requirements, but
Management and Development Board (or
the larger segment comprising the lower-
Tabung Haji) may provide opportunities for
income group provides a potential niche
market expansion, as Tabung Haji
market for the Takaful industry.
depositors are made up of Muslims with
Consumers’ increasing disposable income
substantial savings, which could boost
also heightens the need for financial
demand for Takaful products.
planning, to provide adequate financial
security, especially to cater to their
Meanwhile, marketing Takaful products
children’s education as well as their own
through bancatakaful must be done more
medical and retirement needs.
extensively to benefit from the banking
system’s vast network. As the Internet
Takaful operators must intensify their
becomes an important part of most
efforts to promote greater risk awareness
people’s lives, online marketing of Takaful
and better product innovation, not to
products ought to be seriously considered.
mention diversifying their distribution
channels to reach a larger segment of the
All said, endeavours to create a resilient
market. A nationwide study has concluded
and sound Takaful industry within the
that a large portion of the population finds
domestic Islamic financial system -
information dissemination on Takaful
although a challenging task - have been
products and services to be particularly
worthwhile.
ineffective, although the majority (88%) of
the sampled population seems to be aware
of it5. Takaful operators’s ability to offer
attractive and flexible products is essential
towards strengthening demand. Economic

5
Evaluation of Malaysian Takaful Industry, Malaysian
Takaful Association and IRDC, UiTM (2008)

Special Report – Taking Takaful to the next level: The Malaysian Experience 9
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 6th World Takaful Conference 2011

RAM Ratings’ approach in Takaful

rating
Introduction

T
he financial strength of
RAM Ratings’ assessment of the Takaful
Takaful operators is never
operator’s risk profile aims to measure
uniform, which is common
the likelihood of default on the entity’s
for conventional insurers across the
financial obligations. It is important to
globe. Thus, obtaining a financial
note that the CPA rating is not an
strength rating may demonstrate that
indication of the product or service
the company provides adequate financial
quality offered by the Takaful operator.
security. In some jurisdictions, being
rated can also have some regulatory
While RAM Ratings uses both qualitative
benefits, as regulators increasingly
and quantitative analyses in its CPA
incorporate rating agencies’ views into
rating process, the importance of
their frameworks. Going through the
qualitative analysis cannot be over-
rating process also demonstrates the
emphasised. Interaction between RAM
adequacy of the entity’s internal
Ratings’ analysts and the senior
steering and risk-management systems.
management of the rated Takaful
operator is central to the rating process.
Many of the Takaful operators are at
This facilitates a better understanding of
their infancy stage and yet to have any
the corporate strategies employed by
established track record. While this is
the said company in shaping its
not an impediment to being rated, it is
competitive position in the industry.
important to have appropriate risk-
Since a CPA rating is prospective and
management structures and practices in
long-term in nature, the credit opinion is
place to successfully complete the rating
also supported by our assessment of the
process. The track record of senior
management’s risk appetite and its
management as well as the breadth and
ability to generate future growth. In
depth of the actuarial teams also tend to
addition, external issues such as
play very important roles.
industry characteristics and the
regulatory environment form part of our
Analysis of Takaful operators qualitative assessment.

In analysing Takaful operators, RAM RAM Ratings’ quantitative analysis

Ratings looks at their claims-paying
ability (or CPA). The CPA rating portrays
the relative risk profile of a Takaful
operator in relation to its ability to pay
policyholders’ liabilities or claims. It also
represents RAM Ratings’ independent
opinion on the operator’s financial
strength, creditworthiness and long-
term viability. We adopt a holistic
approach when arriving at our rating
opinion, taking into consideration both
the qualitative and quantitative
assessment of the Takaful operator.
depends on the particular operator’s line
of business, although it generally
involves a detailed evaluation of the
entity’s risk exposures, current financial
standing and capitalisation levels. The
quantitative measures for family and
general Takaful operations are rather
different due to the inherent features of
these 2 businesses. General Takaful
products are typically short-term in
nature and based on the concept of
indemnity, whereby the Takaful operator
compensates the beneficiary of the

Special Report – Taking Takaful to the next level: The Malaysian Experience 10
RAM Ratings
 6th World Takaful Conference 2011
policy for the actual economic losses, up
to the limiting amount of the Takaful
policy; it usually requires the insured
(the participant) to prove the amount of
losses. On the other hand, family
Takaful products are usually long-term
in nature and the amount of the
beneficiary's economic loss is irrelevant.
The Takaful operator is obligated to pay
the entire policy amount to the
beneficiary if the cause of death of the
insured person (participant) is not
excluded from the policy. In the case of
disability Takaful, the policy amount is
payable to the insured person.
Regulatory environment
The assessment of the Takaful
operator’s regulatory environment will
cover the level of regulation and the
impact of regulatory restrictions on the
company’s operations. Understanding
the Government’s policies and legislative
framework and their effects on the
Takaful sector’s regulatory structure are
crucial when analysing the potential
growth of the Takaful industry and the
performance of such companies. RAM
Ratings also closely examines the
Central Bank’s guidelines on the
operations of Takaful companies,
including prudential controls on capital
adequacy, liquidity requirements and
dividend policies.
Competitive position
Takaful operators that have strong
balance sheets and acceptable risk
exposures can have a very strong ability
to pay claims in the near term. For a
high level of financial strength to be
maintained over the long run, however,
the Takaful operator must have a
sustainable competitive advantage.
Strengths or weaknesses in the
following areas can affect a company’s
ability to achieve its competitive
advantage:
Special Report – Taking Takaful to the next level: The Malaysian Experience
RAM Ratings
• Size and diversification
Due to the size factor, large Takaful
operators (particularly those in family
Takaful) may be considered systemically
important entities since they are liable
for a large portion of the country’s
Takaful policies. They may hence have
the ability to influence regulations and
are more likely to be bailed out by the
authorities.
• Brand recognition and
franchise value
Market recognition is the key factor
when determining the success of a
Takaful company’s marketing campaign.
The perception attached to that
recognition would invariably reflect the
Takaful operator’s franchise value.
Clearly, having a good franchise would
make it easier to win customers’
confidence and loyalty.
• Distribution capabilities
A Takaful company’s distribution
capability is an important competitive
factor for business growth. Larger
Takaful companies usually have an
extensive agency force and distribution
network that smaller companies will
require time to set up. Apart from the
traditional agency force, other methods
of distribution such as through a
bancatakaful network can enhance an
operator’s customer reach.
Management and strategies
The management team of a Takaful
company plays a crucial role in
managing the risk profile of the
company. When assessing management
quality, RAM Ratings looks at the
management’s track record in meeting
expectations and its control over the
operations of the company. The
management is also evaluated on its
business and investment risk appetite,
its ability to establish competitive
advantages and its succession planning.
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 6th World Takaful Conference 2011
Underwriting and risk
management
Prudent underwriting practices and risk-
management processes are key to the
Takaful operator's financial well-being
since excessive claims could undermine
its profitability and impinge on its long-
term ability to pay claims. RAM Ratings
evaluates a Takaful operator’s
underwriting quality vis-à-vis its
underwriting criteria, process, expertise
and claims experience. We also assess
the the operator’s underwriting
profitability and the operating cost
efficiency of its overall portfolio as well
as at the individual line of business. The
trends that emerge from such analysis
are compared against those of its
industry peers.
Retakaful plays an important role as
both a risk-management and capital-
relief component for a Takaful operator.
The ceding Takaful operator transfers or
cedes all or a portion of the insured risk
to retakaful operators. Given the lower
insured risk, low retention of risks
provides earnings stability to the ceding
Takaful operator. However, its
profitability will be compensated at the
same time. There are 2 basic types of
retakaful programmes: a) facultative
retakaful, which is retakaful covering a
specific Takaful policy; and b) treaty
retakaful, which includes a quota share-
treaty arrangement6 and a loss-portfolio
transfer7. In our assessment, we review
the credit quality of the retakaful
operator and the documentation
governing the risk transfer. Highly rated
providers of retakaful programmes are
viewed positively.
6 Takaful company to meet its liquidity
Gross contributions written and losses on the portfolio
are shared between the ceding Takaful operator and the
retakaful operator, on a pro rata basis.
7
A retakaful transaction where loss obligations have
already been incurred and will ultimately be paid are
ceded to a retakaful operator.
Special Report – Taking Takaful to the next level: The Malaysian Experience
RAM Ratings
Investment strategy
A Takaful operator’s profit performance
is usually derived from 2 distinct
activities: underwriting and investing.
Investing is then further segmented into
investment income and capital gains or
losses. Since these income-generating
assets represent a large part of the
Takaful operator's claims-paying
resources when required, RAM Ratings
views the credit quality, liquidity and
investment yields of the investment
portfolio as crucial factors when
assigning Takaful companies’ CPA
ratings. In addition, we will examine the
matching of the maturity of its
investment portfolio with that of its
insured liabilities.
In Malaysia, regulatory requirements
under the risk-based capital framework
significantly influence Takaful
companies’ investment strategies as all
investment assets are risk-weighted
with a capital charge (i.e. Takaful
companies need to allocate capital for all
investment assets; the riskier the
assets, the higher the capital charge).
Highly rated Takaful companies are
expected to be prudent in their
investment strategies; hence their
investment portfolios are envisaged to
be of high quality and contain a large
proportion of easily liquefiable assets.
Furthermore, the investments should
ideally match the Takaful operator's
potential contingent liabilities in terms of
exposure values and maturities.
Liquidity
As part of the rating process, RAM
Ratings will evaluate the ability of the
demands. Liquid assets are the primary
source of liquidity for Takaful
companies, and are considered stronger
than any contingent funding
12
 6th World Takaful Conference 2011

commitments. Liquid assets include cash involved8 and the uncertainty of losses
and short-term quoted securities that and claims, a sustainable trend in
can be sold quickly to meet short-term contribution growth is critical to the
needs. RAM Ratings expects highly rated long-term viability of the Takaful
Takaful operators to maintain a high company.
proportion of liquid assets relative to
their Takaful liabilities, to meet their Profit returns indicators, measured
liquidity requirements. Although equity relative to assets and revenues (i.e.
securities are considered liquid assets, profit margins), are compared to those
they are deemed more risky. On the of its peers with similar business
other hand, real estate/properties can profiles. Companies with more
be illiquid although they generally diversified earning sources are viewed
appreciate over a longer time. Hence the more positively than those with
Takaful company will need to strike an concentrated revenue bases. In the
acceptable balance between investment same context, companies with a record
yields and risks in its investment of stable earnings are viewed more
strategy. favourably than those with volatile
earnings. Assessment of the
Although maturity mismatches for a consistency, sustainability and
family Takaful company’s assets and predictability of underwriting and
liabilities are unavoidable given the lack investment income is vital to the rating
of long-term liquid investments, it will process. The Takaful operator’s pricing
be a concern when the maturity strategies should demonstrate the ability
mismatches are excessive and affect the of the contribution (wakalah fee) income
company’s performance. General Takaful to provide sufficient returns on the
companies, on the other hand, have less capital required to support the business.
of a problem in maturity mismatches
given the short tenure of their products; The evaluation of general Takaful
but they have to maintain a more liquid operator’s earnings is more
investment portfolio to meet less straightforward given that the majority
predictable liquidity demands. of its contracts are short-term in nature.
On the other hand, there are limitations
Meanwhile, RAM Ratings also reviews to analysing the current-year
external sources of liquidity, such as performance of a family Takaful
committed banking lines and call capital, operator’s earnings given the long-tail
as part of its liquidity contingency nature of family policies. As such, RAM
planning. Ratings’ profitability analysis of both
general and family Takaful companies
Financial performance also emphasises the companies’ future
performance. We note that certain
A Takaful operator’s profitability is an jurisdictions have adopted the
important factor when assessing its ”embedded value” reporting method9,
ability to build and preserve its capital. which is viewed to be a more reflective
This rating factor provides an insight
8
into the company’s overall profitability Some costs, such as commissions, are paid upfront
but are assumed to be gradually expensed throughout
and operating efficiency. We also look at the term of the life Takaful policy. Hence non-recovery
the sources, volatility and trends of the of the expenses is possible if the policy is terminated
early.
Takaful operator’s income over time. 9
It provides an estimate of the present value of future
Given the high acquisition costs profits over the lifetime of the family Takaful portfolio.

Special Report – Taking Takaful to the next level: The Malaysian Experience 13
RAM Ratings
 6th World Takaful Conference 2011

measurement of the performance of a attention will be monitored closely. In

family Takaful business. the case of a Takaful company with
weak capital adequacy, we will assess
RAM Ratings is mindful that the its ability to raise additional capital
differences in accounting standards or and/or implement capital relief
reserving requirements between Takaful measures, such as reducing
companies in various jurisdictions could participants’’ bonus payment or
materially affect profitability engaging in additional retakaful
comparisons. In such instances, we will programmes.
first make a judgement on the
conservatism of the practices based on Financial flexibility
local regulations, before making any
profit comparison. A Takaful operator’s CPA rating may be
influenced by the extent of its financial
Capital Strength flexibility. Assessment of financial
flexibility identifies the options available
Capital serves as a Takaful operator’s to a Takaful company when trying to
cushion in absorbing expected and raise additional capital for business
unexpected negative events. Therefore, expansion, or to restore eroded
a strong level of capital relative to the capitalisation levels. Common forms of
risks taken by the Takaful operator is an financial flexibility are financial
important factor when looking at its resources from shareholders, the
overall credit quality. This rating factor Takaful operator’s ability to tap the
looks at how well the Takaful company equity or capital markets for funds, and
is capitalised, which will provide an standby liquidity lines from financial
indication of its ability to withstand institutions.
stress. Companies that have strong
capitalisation levels are more capable of A Takaful company owned by financially
withstanding losses arising from claims, strong shareholders is a positive factor
thus implying a strong ability to pay in a CPA rating.
claims. Nonetheless, the Takaful
operator's capital strength has to be However, overly generous dividend
assessed relative to its risk exposures, payments to shareholders could stretch
since higher risk exposures would the Takaful operator’s financial
require stronger protection to provide resources, and are therefore viewed
the same level of comfort, and vice negatively. Similarly, the potential need
versa. for a Takaful company to divert capital
to support under-performing subsidiaries
RAM Ratings’ assessment on the and associates is not viewed favourably.
adequacy of Takaful reserves involves As such, strict regulations governing the
reviewing actuarial valuation reports and Takaful operator’s dividend flows and
monitoring regulatory ratios, such as capital conservation are important rating
solvency margins or risk-based capital- considerations. In addition, the Takaful
adequacy ratios. We have a more company will be at an advantage if the
favourable view of jurisdictions with owners are able and willing to
strong solvency regulations. The trends commit/infuse additional capital when
in these ratios are compared with those needed.
of the rated entity’s industry peers; the
Takaful operator that requires regulatory

Special Report – Taking Takaful to the next level: The Malaysian Experience 14
RAM Ratings
 6th World Takaful Conference 2011

Elsewhere, business synergies created

with shareholders or shareholders’
related companies are also viewed as a
positive rating factor. These synergies
include benefits such as captive
markets, franchise value, sharing of
distribution networks and cost efficiency.
While capital plays a critical role in the
assessment of a Takaful operator’s CPA
rating, it is not the sole factor for the
consideration of a high rating. For
instance, a Takaful company that lacks a
viable block of business or has a large
risk appetite for investments is not likely
to get a high rating, regardless of its
existing capital strength.

Conclusion

Consistent with the rating methodology

applied to conventional insurers, RAM
Ratings’ approach to rating Takaful
operators encompasses both qualitative
and quantitative factors. An assessment
of risk management and corporate
governance as well as external support
and the sovereign environment also
plays a crucial role.

Special Report – Taking Takaful to the next level: The Malaysian Experience 15
RAM Ratings
Malaysian Sukuk Market Handbook
Your Guide to the Malaysian Islamic Capital Market

ISBN: 978-983-44255-0-0
Published by RAM Rating Services Berhad

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RAM Ratings, a leading credit-rating agency in Asia, was incorporated in 1990 as the
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Information contained in this publication is obtained from sources believed to be reliable and correct at
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advice, as it does not comment on the security's market price or suitability for any particular investor.

Published by RAM Rating Services Berhad

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