KUALA LUMPUR: Malaysia's strong Islamic finance ecosystem, digital transformation, and growing takaful awareness would position the country to become a global leader in Islamic finance and takaful, according to Fitch Ratings.
It said that the profitability and capitalisation of the takaful sector will sustain stability amidst macroeconomic adversities, driven by continued growth.
It noted that the burgeoning awareness of medical and weather event coverage is poised to stimulate takaful expansion in Malaysia, notwithstanding several obstacles, including an inflationary economic backdrop, market fluctuations, a depreciating ringgit, and the cessation of tax exemptions on passenger cars.
In the first half of 2023 (1H23), family takaful contributions experienced a 3.9 per cent year-on-year (YoY) decline following two consecutive years of substantial growth.
Fitch said that although protection product growth remained steady, this was counterbalanced by a decrease in investment-linked products amid uncertainties in the market.
Notably, the 20.1 per cent YoY upsurge in general takaful growth during 1H23 was propelled by motor contributions, buoyed by tax-free passenger car sales booked before March 31, 2023, it said.
Despite challenges, the takaful sector retained a market share of 32 per cent in the insurance market during 1H23.
Fitch viewed enhanced risk selection as a primary driver for broader margins, yet notes that a higher general takaful claim ratio in 2023, primarily due to recurrent floods, led to underwriting losses.
Meanwhile, Fitch viewed the increasing demand for digital services as a catalyst for takaful growth, with Bank Negara Malaysia aiming to finalise the regulatory framework for digital insurers and takaful operators by the first half of 2024.
Since Jan 1, 2023, Malaysia Takaful has adopted the Malaysia Financial Reporting Standard (MFRS) 17, with the impact of reporting changes mostly yielding positive outcomes for family takaful.
Conversely, the financial implications for general takaful are akin to MFRS 4, influenced by its shorter duration.