Weakening Ringgit, market volatility threaten Malaysian takaful sector growth

March 01, 2024 (MLN): The increased awareness of medical and weather events coverage is likely to stimulate takaful growth in Malaysia but will face some headwinds, including the inflationary environment, market volatility, weakening ringgit, and the end of the passenger cars tax exemption, says Fitch Ratings.

Fitch expects profitability and capitalization of the takaful sector to remain stable on sustained growth despite macroeconomic challenges.

A supportive Islamic finance ecosystem, digital transformation and rising awareness of takaful, will strengthen Malaysia's position further as one of the global centers of Islamic finance and takaful.

The family takaful contribution declined by 3.9% YoY in 1H23 after rising significantly over two consecutive years.

Growth in protection products is steady, but the contributions are offset by a decline in investment-linked products amid market uncertainties.

General takaful growth of 20.1% YoY in 1H23 was driven by the motor contribution, boosted by tax-free sales of passenger cars booked before 31 March 2023. The takaful sector maintained its market share at 32% of the insurance market in 1H23.

Fitch views improvement in risk selection as the main driver for wider margins. The higher general takaful claim ratio of 64.3% in 2023 (2022: 60%), due to frequent floods, resulted in underwriting losses. Meanwhile, family takaful's underwriting margin was hit by medical inflation.

Fitch sees growing demand for digital services as a catalyst for takaful growth. Bank Negara Malaysia plans to finalize the regulatory framework for Digital Insurers and Takaful Operators by 1H24.

Malaysia Takaful has applied Malaysia Financial Reporting Standard (MFRS) 17 since January 01, 2023, and the impact of reporting changes on family takaful is mostly positive. Meanwhile, the financial outcomes of general takaful are similar to MFRS 4, affected by its shorter duration.