Investment-Linked Products a Growing Trend in Family Takaful

Family takaful, or Islam-compliant insurance, could spark potential growth for investment-linked products in Malaysia and Indonesia.

Takaful market opportunities, especially in the investment-linked class, are substantial, given the low penetration, rising income, growing population and knowledge in this sector, said Azim Mithani, chief executive officer of Prudential BSN Takaful Bhd., the U.K.-based Prudential's Malaysian takaful venture, with 49% of shares.

The company initiated a special linked product offering spiritual fulfillment, protection and savings to "pique the interest of potential customers," Mithani said. Prudential BSN also offers a series of investment-linked products combined with family, health and education protection.

New business contributions from investment-linked products increased to 402.7 million ringgit (US$125.3 million) in 2010 from 362.8 million ringgit in 2009, according to Bank Negara Malaysia, the country's central bank and regulator. Investment-linked products accounted for 15.6% of the total 2.6 billion ringgit new takaful business contributions.

Prudential's joint venture partner, Bank Simpanan Nasional, has laid down a "good platform" for bancatakaful distribution, given the bank's extensive branch network and established brand equity, according to Mithani.

Mithani said the company believes in broad-based distribution for boosting growth. With 8,500 Prudential agents and 1,600 Prudential BSN direct agents, Mithani stressed the importance of having a strong and professional sales force. The company also forms bancatakaful partnerships with established financial institutions such as BSN and Affin Islamic Bank.

In Malaysia, Prudential BSN achieved a 31% market share of new takaful business for the regular contribution segment in 2010. Product growth is driven by both agency channels and bancatakaful, noted Mithani.

Mithani said Prudential BSN managed to achieve profitable underwriting in four years, with the focus on efficient distribution and operation. Strong risk management in underwriting and claims is also essential, he added.

Takaful business is "fairly new in the market and as such, there is immense room to grow and develop innovative products," said Mithani. However, the challenge is "getting the right talent to support the fast-growing industry," compared to traditional insurance.

In investment, Mithani said "the Islamic debt security market poses the greatest challenge in terms of availability." Prudential BSN invests largely in equities and Islamic debt securities.

Shariah, or Islamic law, compliance is a key difference of takaful's operating model, he said.

Mithani said "we see an increasing need for Shariah protection and investment plans," since the launch of Prudential BSN in 2006. Takaful is one of the fastest-growing Islamic financial sectors in Malaysia, growing 20% to 25% per year during the past five years. Prudential BSN also offers general takaful products for home, personal possessions and accident protection.

The government has played "a prominent role" by laying down Islamic finance foundations, market liberalization and encouraging takaful operators to accelerate development.

In Indonesia, Prudential captured 54% of Shariah market share, in terms of premium income, as the leading player. Introduction of investment linked products and expansion into rural areas contributed to the increasing proportion of Muslim customers to 41% in 2010 from 26% in 2006, said Prudential in a presentation.

Shariah-linked products presented 17% of new business mix for Prudential's life business in Indonesia for the first half of this year.

(By Iris Lai, Hong Kong bureau manager: Iris.Lai@ambest.com)