Business

Tuesday February 28, 2012

MTA expects takaful players to easily adopt new framework

By DALJIT DHESI
daljit@thestar.com.my


KUALA LUMPUR: The risk-based capital (RBC) framework for the local takaful industry is expected to take effect by January next year or the following year but will not be onerous to industry players as it will likely be based on the parameters of the conventional insurance framework, according to the Malaysian Takaful Association (MTA).

Deputy chairman Zainudin Ishak said the capital requirements under the proposed RBC framework for takaful would not burden the industry and would be benchmarked to the RBC framework introduced in January 2009.

Under the conventional framework, insurance companies are required to have a minimum 130% of supervisory capital-adequacy ratio (CAR).

He told StarBiz that the guidelines for the new framework in the takaful industry may be issued this year.

Zainudin : ‘Most of the takaful players are already benchmarking with the existing RBC framework for conventional insurance and it would not be a problem for them to adopt the new framework.’

One significant change in the new framework would be the explicit mentioned of “Qard” (interest-free loan) and its proposed treatment by the operators.

This new rule imposed a legal obligation on the takaful operators to provide for Qard to the takaful funds that are in deficit.

The underlying formula in determining the CAR had been set in a manner that it required takaful operators to hold sufficient capital in the shareholders' fund to meet any potential deficits in the takaful funds, he said.

“Most of the takaful players are already benchmarking with the existing RBC framework for conventional insurance and it would not be a problem for them to adopt the new framework when it comes on stream.

“Although the level of preparation among takaful players towards the new framework may differ, nonetheless MTA is confident it will be a smooth transition,” he said during an interview.

He added the need for the framework was to ensure takaful operators at all-time maintained adequate capital level that commensurate with their operational risks and act as a financial buffer against any exposure to risks.

On whether the requirement to hold adequate capital under the framework would spark consolidation in the takaful industry as it did previously in the conventional insurance segment, Zainudin said he did not foresee it happening as most of the takaful players were well capitalised and had foreign shareholding base.

Most analysts agreedthat the RBC framework in the takaful industry would not lead to merger and acquisitionsunless the shareholders of smaller takaful operators are not willing to invest or inject capital as in the case of smaller general insurers which had to merge under the RBC conventional insurance framework.

There are currently 12 takaful operators in the country.

Asked whether the current eurozone sovereign debt crisis and the slowdown in the US economy would impact pricing of insurance or takaful, he said it would be if the crisis was left unabated, adding that most reinsurance was sourced from European reinsurers like Munich Re and Swiss Re.

Zainudin said: “If the situation in the eurozone worsens and causes the reinsurers to hike their pricing, then the takaful and insurance companies including those in Malaysia would likely see higher prices for takaful and insurance products.”

Growth wise, he said the new Financial Sector Blueprint (2011-2020) would provide the impetus for the takaful industry to grow further by promoting access to other financial services sectors by introducing a range of directives, guidelines and best practices that would indirectly facilitate and drive its growth.

Among the recommendations in the blueprint were to develop a vibrant private pension industry for retirement and old age and the provision of wealth management products and services to cater to the demand of the growing affluent segment.

The industry experienced a compounded average growth rate of 27% in terms of net contributions between 2005 and 2010, with family takaful driving the growth at 28% for the same period.

Family takaful growth dominated over 80% of the total takaful market in 2010, and MTA was upbeat on the continued strong growth momentum, underpinned by rising affluence amid strong economic fundamentals.

Given the large untapped market that still exists with only 54% of the population having a life insurance or family takaful policy, the takaful industry was poised to benefit in years ahead, Zainudin added.

He said some of the major issues in the industry were inadequate investment instruments to meet the needs and demands of businesses as well as the shortage of talent.

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