Es­ti­mat­ing the Pro­tec­tion Gap

FRI­DAY 27TH JUNE 2014 MARKED A SIG­NIF­I­CANT MILE­STONE FOR THE MALAYSIAN TAKA­FUL AS­SO­CI­A­TION, WITH THE LAUNCH­ING OF THEIR RE­SEARCH PUB­LI­CA­TION, TI­TLED “THE STORY OF GAP: CHART­ING TAKA­FUL GROWTH IN MALAYSIA” BY THE HON. DEPUTY MIN­IS­TER OF FI­NANCE DATO’ HJ. A

Insurance - - CONTENTS - Text Dato' Haji Syed Mo­heeb Syed Ka­marulza­man

The re­search high­lighted that those below 30 years and above 50 years are un­der­served by the in­sur­ance and taka­ful in­dus­try as the for­mer prefers to spend on life­style ac­ces­sories, and the lat­ter group are not able to get cover due to max­i­mum en­try age and un­der­writ­ing lim­i­ta­tions. It was fur­ther ob­served that prod­uct dis­tri­bu­tion in East Malaysia re­mains a ma­jor chal­lenge and the lower in­come group lack dis­pos­able in­come af­ter meet­ing daily liv­ing needs. These have al­ways been a chal­lenge for the in­sur­ance and taka­ful in­dus­try; although con­sumers are aware that in­sur­ance and taka­ful are im­por­tant, most con­sumers of­ten de­lay in­vest­ing. There is a gen­eral lack of pub­lic aware­ness of fi­nan­cial plan­ning and ef­forts to im­prove dis­tri­bu­tion into ru­ral places have not borne re­sults. The agency chan­nel is still made up largely of part-timers and agency train­ing needs to be up­graded to move agents from prod­uct push­ing and sell­ing prod­ucts with higher com­mis­sions only, to sell on needs and be well versed to pro­vide ad­vice on fi­nan­cial plan­ning. In the banca chan­nel, sale of in­sur­ance prod­ucts are se­condary to bank­ing and in­vest­ment prod­ucts as the lat­ter are eas­ier to sell. The study also showed that the most pop­u­lar prod­uct sold by the taka­ful mar­ket is credit-re­lated, and to some ex­tent, in­vest­ment-linked prod­uct as sell­ers find it flex­i­ble of be­ing cus­tom­ized to meet dif­fer­ent needs of con­sumers. On the other hand, most con­ven­tional in­sur­ers sell mainly pure-pro­tec­tion prod­ucts. Gen­er­ally, con­sumers view in­sur­ance and taka­ful as a sav­ings and in­vest­ment ve­hi­cle rather than a pure pro­tec­tion ve­hi­cle.

Gen­er­ally, con­sumers view in­sur­ance and taka­ful as a sav­ings and in­vest­ment ve­hi­cle rather than a pure pro­tec­tion ve­hi­cle.

The re­search was done in col­lab­o­ra­tion with Ac­tu­ar­ial Part­ners Con­sult­ing Sdn. Bhd., with a view to es­ti­mate the pro­tec­tion gap in Malaysia as at 2012. It cov­ered the fol­low­ing ar­eas 1. The es­ti­mated pro­tec­tion gap in Malaysia, by mar­ket seg­ments

2. Key rea­sons un­der­ly­ing the pro­tec­tion gap 3. Po­ten­tial strate­gies to min­imise the pro­tec­tion gap and es­ti­mated the pro­tec­tion gap by age, in­come, ge­o­graph­i­cal area, gen­der and mar­i­tal sta­tus The pro­tec­tion gap is es­ti­mated for work­ing adults in Malaysia against the fi­nan­cial con­se­quences of death, crit­i­cal ill­ness and dis­abil­ity upto re­tire­ment age. The fi­nan­cial needs be­yond re­tire­ment age, po­ten­tial sav­ings gap and pro­tec­tion pro­vided by med­i­cal cov­ers and gen­eral taka­ful and in­sur­ance are ex­cluded from the study.The study showed that the es­ti­mated pro­tec­tion gap in Malaysia is es­ti­mated to be RM2,489 bil­lion, as at 2012, which trans­lates to an av­er­age pro­tec­tion gap of 8.7 times the av­er­age an­nual in­come. It was ob­served that those in the 30 years and below, the big­gest pro­por­tion of work­ing pop­u­la­tion, have the largest ag­gre­gated pro­tec­tion gap of RM 1,065 bn, or an av­er­age of 17 times of the an­nual in­come. This is due to the pref­er­ences of the younger gen­er­a­tion to spend on life­style and entertainment items. The low­est in­come group, i.e. those earn­ing below RM1000, has the largest ag­gre­gated

pro­tec­tion gap of RM 916 bn, or an av­er­age of 17.5 times of the av­er­age an­nual in­come. This group forms the largest work­ing seg­ment. The ag­gre­gate gap is high­est for those work­ing in Klang Val­ley, Jo­hore, Sabah, Sarawak and Pe­nang, with av­er­age gaps of 6, 9, 15, 11 and 11 times of an­nual in­come re­spec­tively. Sabah’s gap is higher than the na­tional av­er­age due to the low level of earn­ings, high cost of liv­ing and low in­sur­ance pen­e­tra­tion rate due to chal­lenges in dis­tri­bu­tion. Klang Val­ley has a lower av­er­age gap due partly to the com­par­a­tively lower cost of liv­ing com­pared to Jo­hore, Sabah, Sarawak and Pe­nang. Sin­gle peo­ple, mostly young, new to the work­force and have min­i­mal sav­ings or in­sur­ance pro­tec­tion, have a higher ag­gre­gated pro­tec­tion gap of 17 times of an­nual in­come com­pared to those who are mar­ried, at 5 times the an­nual in­come. The pro­tec­tion gap be­tween males and fe­males are sim­i­lar in ag­gre­gate, but on an av­er­age, the av­er­age pro­tec­tion gap is larger for fe­males due to the lower pro­por­tion of fe­males in the work­ing pop­u­la­tion, as well as lower sav­ings and ex­ist­ing in­sur­ance and taka­ful cov­er­age. The study showed the em­ployed pop­u­la­tion has a lower pro­tec­tion gap as com­pared to the self-em­ployed, as

Let us hope that every­one would set aside their own agen­das and pri­or­i­ties, and agree to work to­gether to en­sure bet­ter fi­nan­cial fu­ture for all Malaysians.

the for­mer are mem­bers of SOCSO and the EPF. There is there­fore a need to find ways to ex­tend SOCSO to the self-em­ployed. Aris­ing from the sur­vey find­ings, the key po­ten­tial strate­gies iden­ti­fied by the Malaysian Taka­ful As­so­ci­a­tion to min­i­mize the pro­tec­tion gap in Malaysia are: • Pro­vid­ing ed­u­ca­tion on the im­por­tance of fi­nan­cial plan­ning and the im­por­tance of hav­ing in­sur­ance/taka­ful pro­tec­tion • De­vel­op­ing a fair and suit­able tax in­cen­tive to in­crease the in­sur­ance/taka­ful pen­e­tra­tion rate • In­creas­ing the aware­ness of con­sumers on the im­por­tance of in­sur­ance/taka­ful cover and fi­nan­cial plan­ning through road-shows, talks at uni­ver­si­ties

• Pro­vid­ing bet­ter agency train­ing • Re­view­ing the agency force struc­ture in Malaysia • De­vel­op­ing a more suit­able and ex­ten­sive dis­tri­bu­tion chan­nel to reach a wider con­sumer group such as those in East Malaysia and those in ru­ral ar­eas • De­vel­op­ing prod­ucts that are ap­pro­pri­ate to the tar­get mar­kets The study rec­om­mends that the im­ple­men­ta­tion of the strate­gies be con­sid­ered holis­ti­cally by all in­dus­try play­ers and reg­u­la­tors to en­sure co­or­di­nated ef­fec­tive­ness and ef­fi­ciency. The im­me­di­ate chal­lenge now is to get all stake­hold­ers to­gether, ie in­sur­ers, taka­ful op­er­a­tors and their dis­tri­bu­tion, BNM, var­i­ous govern­ment min­istries and agen­cies, uni­ver­si­ties and in­dus­try train­ing in­sti­tutes, to sit to­gether to dis­cuss how to move for­ward. Let us hope that every­one would set aside their own agen­das and pri­or­i­ties, and agree to work to­gether to en­sure bet­ter fi­nan­cial fu­ture for all Malaysians.

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