This article first appeared in The Edge Financial Daily, on January 7, 2016.

KUALA LUMPUR: The growth potential of the Malaysian takaful sector, which saw strong growth in 2015, is favourable, particularly due to encouraging demographics and government support, according to a new report by Fitch Ratings yesterday.

It said family takaful, which represented 29.7% in the first half of 2015 (1H15) of total new life insurance business, was up 7% on end-2014, while general takaful by gross direct contributions, was 11.6%, up 1% in 1H15. According to Bank Negara Malaysia, Malaysia dominates the takaful market in Asean, with around a two-third market share (71%). 

Fitch said wider product innovation and distribution coverage is likely to drive sector growth as public acceptance of the model increases.

Malaysia’s takaful industry grew faster than conventional insurance, with general and family takaful recording 8.3% and 9.7% growth respectively at end-June 2015, compared with conventional general and life insurance growth of 6.6% and 0.4% respectively, said Fitch. 

It said the new regulations and capital requirements, and the need in many cases to independently finance and run insurance units, mean takaful operators with limited scale and capital burdens are likely to exit or merge over time.

“The regulatory, legal and accounting environments are key areas of development for the takaful and retakaful industry. Fitch views the recent regulatory reforms extended to the takaful sector in Malaysia, including the introduction of [an] internal capital adequacy assessment process, the Financial Services Act and gradual deregulation of tariff rates, as a positive development that could cement the region as a takaful hub,” it said.

Fitch expects the Malaysian takaful and insurance sector’s mergers and acquisitions activities to continue, due to attractive growth prospects and new regulatory pressure.