Focus | 2014 Outlook & Challenges

2014 Key Trends For

Life Insurance &
Family Takaful
by Jeremy Lim

In Malaysia
The year 2013 is drawing to a
close, and while life insurers
and family takaful operators
work tirelessly to close out the
year on a strong note, the
impending holiday season also
provides us the opportunity to
take stock of the industry as a
whole, and to assess where we
are headed.

The State Of The Industry

So Far
he latest statistics from the Life Insurance

T Association of Malaysia (LIAM) indicate a

1 “Insurance sees better H2” – The Star Online, 4 November 2013
5.9 per cent decline in weighted new
business premium sold for the first half of
2013 compared to the same period last
year1, due to slow industry growth.
However, LIAM has indicated that the second half should
see an improved performance and growth should be
positive.
For family takaful, while growth has slowed considerably
for the first half of 2013 as compared to the same period
last year, double digit growth is still very much in the
cards. Industry participants generally still hold an
optimistic outlook of future growth prospects of family
takaful business.
Here at Towers Watson, we still see Malaysia as a key
growth market in this region, with an average 8 per cent
per annum growth up to 2025. This significant growth will
be underpinned by the burgeoning upper middle class
segment that is reaping the benefits of continued
favourable economic conditions, as the government carries
out initiatives to transform Malaysia into a high income

Nov-Dec 2013 | www.insurance.com.my | 29

2014 Outlook & Challenges | Focus

economy by the year 2020. Couple that with a reported life Outside of BNM, another major
insurance and family takaful penetration rate of 54 per cent2
among Malaysians and that will result in abundant opportunities change instituted by the Malaysian
for insurance and takaful. government in the recent tabling
However, the industry itself is on the cusp of some major changes of the Budget 2014 is the
that may have potentially significant implications to the market. I
will now explore some of these changes and the resulting implementation of the Goods and
challenges.
Services Tax (GST)
The Regulatory Winds Of
Change
Bank Negara Malaysia (BNM), as the regulator of
the industry, can be seen as one of the
important harbingers of change to the industry.
One of the significant legislation under the
purview of BNM that came into force in 2013
was the Financial Services Act (FSA) 2013. FSA
focuses on integrity, fairness and accountability of
financial institutions, while trying to increase the
protection of rights and interests of the consumer.
This regulation will, among other things, result in the
splitting of composite insurers (i.e. life/family takaful and
general insurance/takaful companies), additional business
conduct and consumer protection requirements to comply with, as
well as the requirements that have implications to significant
shareholders of insurance or takaful companies such as Financial
Holding Companies (FHC) i.e. majority institutional shareholder of
an insurance or takaful company that will come under the scrutiny an online insurance product aggregator, the requirement for
of BNM and maximum permissible individual shareholding. companies/operators to offer products directly to consumers,
increased disclosures at point of sales and the requirement for
Under the mandate from the Economic Transformation Programme a balanced scorecard approach in compensating distributors.
(ETP) to increase penetration up to a target 75 per cent level, BNM The many implications of such the concept paper, if
has released the “Life Insurance & Family Takaful Framework introduced as it is, has generated a lot of discussions among
Concept Paper” to drive the industry to achieve the target, while at the industry players, as going forward, there will be less
the same time ensuring that good quality advice is given by reliance on the traditional agency channel, which has been
insurance and takaful intermediaries to consumers. the primary distribution method for decades in Malaysia.
This concept paper seeks to change the way the industry currently
views the distribution of life insurance and family takaful. Among
the many game-changing ideas contained in this concept paper Takaful Specific Regulatory
will be the liberalisation of commissions for investment-linked
products (ILP) and pure protection products3, the establishment of
Updates
In terms of Takaful, 2014 will be the year that the Risk-Based
Capital Takaful (RBCT) guidelines come into full effect, bringing
the industry on par with the current solvency regime practiced
by the life insurance industry. The impact of this regulation, if
we draw some parallel to the life insurance sector, may result
Insurers that have strong in a shift of product focus to less capital intensive products
international ties will be at an such as ILP, as well as an increased need to consider the
overall capital management plan of the operator.
advantage with superior Although not official, it will be widely expected that takaful
analytics – both tools and operators will be subjected to the Internal Capital Adequacy
and Assessment Process (ICAAP), which will ensure that
resources – available to them, operators establish an overall risk management framework,
but this does not mean that there with clear definitions of the operators risk appetite, risk
tolerances and internal target capital level (ITCL). Again, the
is no hope for the rest. implementation of this regulation will align the takaful

2 Based on Bank Negara Malaysia’s estimate as at 2012

3 Subject to certain criteria as specified by Bank Negara Malaysia

30 | www.insurance.com.my | Nov-Dec 2013


industry to the life insurance sector, which implemented this back
on 1 September 2012.
The quick pace on which regulations are being imposed on
takaful operators is just another signal from BNM that it
recognises the tremendous growth and increasing maturity of the
takaful market in the past few years.
Malaysia Budget 2014
Outside of BNM, another major change instituted by the
Malaysian government in the recent tabling of the Budget 2014 is
the implementation of the Goods and Services Tax (GST). Another
potential game-changer, the impact of the GST is unique to the
life insurance industry, mainly due to the fact that the supply of
life insurance/takaful is GST exempt, so the purchaser of the
insurance will not have to pay GST. This means that the insurer
will not be eligible to claim credit on input tax incurred for
making these supplies. In other words, this will mean that
commissions payable to distributors as well as expenses incurred
(although excluding staff salaried expenses) will attract GST. This
increased cost will erode the profit margins of insurers and
takaful operators, and this can only mean that sooner or later, the
costs may be implicitly passed back to the policyholder in the
form of either increased premiums or reduced benefits. However,
with the actual implementation of GST about one and a half years
away, there still remains some possibility that the final form may
differ from what has currently been provided to the industry.
The Retirement Gap
Moving away from the regulatory changes in Malaysia to
demographic changes, Malaysia itself is facing a problem in the
increasing retirement gap: that is, the gap between the
actual financial positions of retirees against what
they actually need to continue to live comfortably.
An oft-quoted statistic states that the majority of
Malaysians will exhaust their retirement savings (i.e.
their Employee Provident Fund (EPF) savings) within
three to five years of retiring. This leaves them in a
tragic conundrum of being unable to provide for
themselves as they are past the working age, while
needing to meet daily rising costs, which is made all
the more acute if they befall any medical condition.
However, the increase in retirement age recently to 60 years
old to a certain extent will mitigate some of these concerns.
The government has stepped in by introducing the Private
Retirement Scheme (PRS), a scheme similar to the EPF (although
administered by private institutions) as well as annuity products
(with certain tax benefits). Tax incentives have been provided as
But it’s worth noting that
with change always comes
opportunities, and to
paraphrase another oft used
analogy, there are so many
worms, and so few birds...
Focus | 2014 Outlook & Challenges
well for the PRS. However, we understand that the take-up rate
remains poor due to the strict withdrawal conditions, low
commission cap being a disincentive to distributors, as well as the
perceived lack of security compared to the guarantees meted out
by the EPF.
The gap represents an urgent social need that requires more
thought and action from the insurers and operators in the
country, but what is the value proposition that can
satisfy all stakeholders in this situation?
The Changing
Society
The last but not the least important
aspect is the changing behaviour of the
consumer itself. Malaysians have the
most number of friends and spend the
most hours on Facebook, as well as boasting
large increases in the penetration of
smartphones, tablets and Internet users. One may question what
this would have to do with conventional life insurance or takaful.
The answer itself lies in the changing way we are communicating
and reaching the customer, and what insurance or takaful really
means in this day and age. Increasingly, we see companies
involving themselves in the social media space, and undergoing a
“rebranding” to lifestyle and wellness companies, and not just a
company that sells “insurance.”
In addition, the increasing and unprecedented progress in
technology allows insurers and takaful operators the chance to
really reduce and simplify their offerings to the customer, with a
“back-to-basics” approach allowing them the chance to connect
and integrate themselves into the lives of customers.
Final Thoughts
The points touched on here could each warrant
their own article, and as such are only the tips of
some very big icebergs. The quote “if you’re
standing still, you’re going backwards” comes to
mind in such times of change, and both insurers and
operators alike need to be keenly aware of the changes
they face come 2014 and beyond and how this is going to
impact the way they run their business and their overall
strategy moving forward. But it’s worth noting that with change
always comes opportunities, and to paraphrase another oft used
analogy, there are so many worms, and so few birds, so who will
be the early one that catches them?
Jeremy Lim is a consultant with the Risk Consulting and Software
(RCS) of Towers Watson Malaysia. Prior to joining Towers Watson, Jeremy
was the valuation manager for Tokio Marine Life Insurance Malaysia,
working on both regulatory and regional reporting requirements. Jeremy
also brings with him solid pricing and modelling experience from his
previous positions as a pricing manager in AXA AFFIN Life Insurance
Malaysia and as an analyst in Watson Wyatt Insurance Consulting
Singapore.
Since joining Towers Watson, Jeremy Lim has been involved in various
assignments, such as valuation model implementation for RBCT
compliance, traditional embedded value review, M&A due diligence, as
well as Appointed Actuary work, such as product pricing and valuation.
Jeremy Lim is currently a member with the Institute of Actuaries UK, and is
waiting on his final paper to qualify as a Fellow.
The author can be contacted at Jeremy.Lim@towerswatson.com
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