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
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.