Em­brac­ing LIFE Frame­work: Ac­cel­er­at­ing Evo­lu­tion of Fam­ily Taka­ful In­dus­try

OVER THE PAST TWO DECADES, THE WAY WE LIVE OUR LIVES HAS CHANGED DRAS­TI­CALLY, IN­FLU­ENCED AND DRIVEN BY EMERG­ING TECH­NOL­OGY AND IN­NO­VA­TIONS. THE UN­PRECE­DENTED RAPID REV­O­LU­TION IN THE WAY IN­FOR­MA­TION IS AC­CESSED GAVE BIRTH TO NEW EX­PE­RI­ENCES IM­PACT­ING VARIO

Insurance - - CONTENTS - Text Wan Ah­mad Na­jib Wan Ah­mad Lotfi, CPIF

Ser­vice stan­dards have risen fol­low­ing in­crease in consumer de­mands to­wards prod­ucts and ser­vices of­fered in the mar­ket. While some in­dus­tries have man­aged to evolve and adapt quickly to these new trends and be­hav­iours, the same can­not be said about in­surance and more so taka­ful – at least this is the case in Malaysia. This can be il­lus­trated by analysing the life in­surance and fam­ily taka­ful pen­e­tra­tion rates over the past decade. While the gen­eral mar­ket land­scape con­tin­ues to change sig­nif­i­cantly, achiev­ing off-thechart consumer reach out rates, the pen­e­tra­tion rate for life in­surance and fam­ily taka­ful re­mains stag­nant. The com­bined pen­e­tra­tion rate over the past 10 years has con­sis­tently been within the range of 50% to 55%, far for from the as­pired na­tional tar­get of 75% by 2020. Sur­pris­ingly, this trend is also ob­served for the much younger and low pen­e­trated fam­ily taka­ful in­dus­try, which has only been able to hit a dou­ble digit pen­e­tra­tion rate since 2010. Even at such a low base, the pen­e­tra­tion rate for fam­ily taka­ful has started to plateau over the last three years, hov­er­ing at ap­prox­i­mately 14%. This flat­ten­ing of pen­e­tra­tion rate came in not too long af­ter the in­dus­try had fi­nally man­aged to reg­is­ter sig­nif­i­cant growths be­tween 2006 and 2012, leap­ing from an ex­tremely low base that has been there for 20 years or so – the pen­e­tra­tion rate stood at only 1.8% at the start of the sec­ond mil­len­nium, 16 years af­ter the in­dus­try was first es­tab­lished back in 1984. There are many fac­tors that might have di­rectly or in­di­rectly con­trib­uted to the flat and stag­nant devel­op­ment of the in­dus­try. Among the ap­par­ent fac­tors in­clude a fac­tor that has been and con­tin­ues to be present since the early days is con­sumers’ stigma to­wards the qual­ity of prod­ucts and ser­vices pro­vided by taka­ful op­er­a­tors. This view ap­plies to the var­i­ous touch points, more fre­quently in­volv­ing dis­tri­bu­tion chan­nels es­pe­cially the agency force. While the ma­jor­ity of agents act in a pro­fes­sional man­ner through­out their deal­ings, the gen­eral rep­u­ta­tion of agents is tainted by ac­tions and be­hav­iours of a small group of ir­re­spon­si­ble and un­eth­i­cal agents. Un­for­tu­nately, this sen­ti­ment neg­a­tively im­pacts the over­all in­dus­try's rep­u­ta­tion given the fact that agency is the largest dis­tri­bu­tion force and busi­ness con­trib­u­tor for the in­dus­try. As at end 2016, on weighted

Sur­pris­ingly, this trend is also ob­served for the much younger and low pen­e­trated fam­ily taka­ful in­dus­try, which has only been able to hit a dou­ble digit pen­e­tra­tion rate since 2010.

ba­sis, 73% of the over­all fam­ily taka­ful new busi­ness was con­trib­uted by the agency chan­nel. The ap­par­ent gaps caused by the evolv­ing mar­ket dy­nam­ics cou­pled with the in­con­sis­tent pro­fes­sion­al­ism stan­dards prac­tised across the var­i­ous com­po­nents of in­sur­ers and taka­ful op­er­a­tors clearly de­picts dras­tic mea­sures are re­quired to shape the in­dus­try to el­e­vate it to the next level. The cur­rent prac­tices and ways taka­ful op­er­a­tors are do­ing busi­ness has not been able to help in in­creas­ing the pen­e­tra­tion rate and ad­dress ex­ist­ing gaps in cre­at­ing value to cus­tomers. There are still huge un­tapped mar­ket op­por­tu­ni­ties wait­ing to be ex­ploited and reached out via new, ef­fec­tive and cost ef­fi­cient meth­ods that are more suited to to­day’s mar­ket con­di­tions, which is still un­der-ex­plored. Re­al­is­ing the es­sen­tial need to ini­ti­ate change and ex­pe­dite in­no­va­tion devel­op­ment in the life in­surance and fam­ily taka­ful in­dus­try, Bank Ne­gara Malaysia took a proac­tive and de­lib­er­ate step to dis­rupt the in­dus­try by is­su­ing the Life In­surance and Fam­ily Taka­ful (LIFE) Frame­work in Novem­ber 2015. The main ob­jec­tive is to cre­ate a con­ducive en­vi­ron­ment; for greater pen­e­tra­tion while pro­tect­ing con­sumers’ in­ter­est. Op­er­a­tionally, the LIFE frame­work sets out planned and struc­tured re­forms to sup­port the devel­op­ment of the in­dus­try by an­chor­ing its ob­jec­tives on im­prov­ing pro­fes­sion­al­ism and prac­tis­ing bet­ter trans­parency that are ex­pected to be achieved through ini­tia­tives grouped un­der three main pil­lars.

PIL­LAR 1: GRAD­UAL RE­MOVAL OF LIM­ITS ON OP­ER­AT­ING COSTS

This is a struc­tured ex­er­cise of lib­er­al­is­ing op­er­at­ing costs, which would pro­vide flex­i­bil­ity to op­er­a­tors to man­age op­er­at­ing ex­penses in line with their busi­ness strate­gies. This is in­tended to spur in­no­va­tion in the cur­rent com­pet­i­tive mar­ket land­scape by trans­fer­ring more con­trol to op­er­a­tors. Ini­tia­tives un­der this pil­lar in­clude lib­er­al­i­sa­tion of com­mis­sion lim­its for se­lected prod­uct lines and pro­vid­ing higher al­lo­ca­tion rates to cus­tomers for in­vest­ment-linked plans.

PIL­LAR 2: DI­VER­SI­FI­CA­TION OF DIS­TRI­BU­TION CHAN­NELS

Ini­tia­tives un­der this pil­lar at­tempts to pro­vide a wider choice of en­try touch points for con­sumers to ac­cess taka­ful prod­ucts and ser­vices. It also in­tends to re­duce the de­pen­dency on agency chan­nel par­tic­u­larly for in­di­vid­ual line of reg­u­lar con­tri­bu­tion busi­ness, while at the same time at­tempts to im­prove qual­ity of busi­ness ac­quired (i.e. im­proved per­sis­tency rate) by build­ing stronger

Op­er­a­tionally, the LIFE frame­work sets out planned and struc­tured re­forms to sup­port the devel­op­ment of the in­dus­try by an­chor­ing its ob­jec­tives on im­prov­ing pro­fes­sion­al­ism and prac­tis­ing bet­ter trans­parency that are ex­pected to be achieved through ini­tia­tives grouped un­der three main pil­lars.

con­trol mea­sures into the es­tab­lished dis­tri­bu­tion chan­nels, ei­ther through in­no­va­tive process im­prove­ments or prod­uct de­sign.

The key ini­tia­tive un­der this pil­lar would be the re­quire­ment for op­er­a­tors to of­fer com­mis­sion-free prod­ucts via di­rect chan­nel ei­ther over-the-counter at the op­er­a­tors' branches or on­line through re­spec­tive op­er­a­tors’ web­site, of which the pref­er­ence is to de­velop the latter.

This is then sup­ported by an in­dus­try­wide on­line prod­uct com­para­tor that would en­able con­sumers to make the nec­es­sary com­par­isons es­pe­cially in terms of pric­ing be­fore de­cid­ing on a par­tic­u­lar taka­ful op­er­a­tor. Re­main­ing re­quire­ments re­volves around ini­tia­tives that pro­mote ban­cataka­ful and fi­nan­cial ad­vis­ers as rel­e­vant op­tions of dis­tri­bu­tion chan­nel for con­sumers to choose from.

PIL­LAR 3: STRENGTH­EN­ING MAR­KET PRAC­TICES

The set of ini­tia­tives un­der this pil­lar fo­cuses on pro­vid­ing bet­ter ser­vice de­liv­ery to con­sumers by el­e­vat­ing the level of pro­fes­sion­al­ism of in­ter­me­di­aries un­der the var­i­ous dis­tri­bu­tion chan­nels and im­prove con­sumers' ac­cess to in­for­ma­tion.

This is ex­pected to be achieved through a struc­tured per­for­mance man­age­ment sys­tem de­signed to mould cer­tain de­sired be­hav­iours to the dis­tri­bu­tion force and also be­com­ing more trans­par­ent in in­for­ma­tion de­liv­ery to con­sumers, be it writ­ten or ver­bal, on­line or off­line. The game-chang­ing ini­tia­tive un­der this chan­nel would be the in­tro­duc­tion of a Bal­ance Score­card, ap­pli­ca­ble to both agency and ban­cataka­ful chan­nels, with slight vari­a­tions across the chan­nels. Pri­mar­ily it changes the re­mu­ner­a­tion struc­ture for the in­ter­me­di­aries where they will be re­warded for prac­tis­ing and ex­hibit­ing high level of pro­fes­sion­al­ism es­pe­cially when pro­vid­ing fi­nan­cial ad­vice to con­sumers. The other sig­nif­i­cant ini­tia­tive in­tro­duced un­der this pil­lar would be the on­line ac­count fa­cil­ity, which would al­low cus­tomers to per­form var­i­ous self-ser­vice func­tions in­clud­ing ac­cess­ing, view­ing and managing their taka­ful ac­count de­tails.

Fun­da­men­tally, LIFE Frame­work at­tempts to cre­ate bet­ter value to con­sumers, which as dis­cussed ear­lier is a key de­vel­op­men­tal and driv­ing fac­tor in to­day's mar­ket. As more con­sumers are able to see value in the prod­ucts and ser­vices of­fered by taka­ful providers, more will start to take up and stay on­board long term, in their own best in­ter­est.

By de­sign, LIFE frame­work is ex­pected to shift the life in­surance and fam­ily taka­ful land­scape sig­nif­i­cantly and it is a given that there would be im­ple­men­ta­tion is­sues and chal­lenges es­pe­cially in­volv­ing change at such a large scale. The chal­lenges come in mul­ti­ple forms; some are tech­ni­cal in na­ture, some in­volves re­source ca­pac­ity and com­pe­tency gaps, many in­volve sys­tem ca­pa­bil­i­ties and the most crit­i­cal as well as ev­i­dent of all, fi­nan­cials.

Firstly, con­sid­er­ing the scale and na­ture of cer­tain ini­tia­tives in­tro­duced by the frame­work, by de­fault, im­ple­men­ta­tion of the ini­tia­tives' re­quire­ments would re­quire huge in­vest­ments es­pe­cially when it in­volves ma­jor sys­tem en­hance­ments or devel­op­ment.

This would have an im­me­di­ate and di­rect hit on op­er­a­tors' bot­tom line. The less ap­par­ent but longer term fi­nan­cial im­pact that may turn out to be sig­nif­i­cant de­pend­ing on how it is man­aged or ad­dressed in­volves the in­crease in cost of busi­ness

and sub­se­quent cor­re­spond­ing new busi­ness strain due to spe­cific tech­ni­cal de­sign re­quire­ments in­tro­duced by the frame­work, such as in­tro­duc­tion of the min­i­mum al­lo­ca­tion rate for in­vest­ment-linked plans and also BSC. Al­though these ini­tia­tives es­sen­tially cre­ate bet­ter value for con­sumers, it does have an im­pact on the un­der­ly­ing prof­itably of the busi­ness, which would even­tu­ally af­fect the over­all cash flow of an in­surer or taka­ful op­er­a­tor. The fi­nan­cial im­pacts de­scribed above does take a higher toll on the taka­ful in­dus­try due to the fact that ma­jor­ity of the taka­ful op­er­a­tors in the mar­ket are rel­a­tively young and small in size, which in­di­cates the fi­nan­cial ca­pac­ity, ca­pa­bil­i­ties and sta­bil­ity of the op­er­a­tors. More than half of the 11 ex­ist­ing taka­ful op­er­a­tors are 10 years old or less and ma­jor­ity of them are still strug­gling to reach economies of scale and gen­er­ate enough op­er­at­ing profits even to break even. Any fi­nan­cial strain or pres­sures; be it di­rectly or in­di­rectly would have a sig­nif­i­cant im­pact on the bot­tom line and cap­i­tal sol­vency con­di­tion of any young, small to medium size taka­ful operations. Ac­knowl­edg­ing these chal­lenges, be it tech­ni­cal, op­er­a­tional or fi­nan­cial does not change the fact that there is a press­ing need for the fam­ily taka­ful in­dus­try to re­form on an ac­cel­er­ated ba­sis in or­der to re­main com­pet­i­tive and rel­e­vant in the mar­ket, of which the re­quire­ments un­der the LIFE Frame­work is in­ten­tion­ally forc­ing the in­dus­try to re­act to these dis­rup­tive high­lights by re­sort­ing to in­no­va­tive solutions and ap­proaches. Tack­ling some of the aris­ing op­er­a­tional is­sues have given birth to ex­plo­ration of new con­cepts and mod­els at an in­dus­try level such as the pos­si­bil­ity of in­tro­duc­ing a fi­nan­cial re­taka­ful fa­cil­ity to help man­age new busi­ness strain due to the in­tro­duc­tion of MAR. Fi­nan­cial re is a fa­cil­ity that has al­ways been avail­able for con­ven­tional life in­surance but was never se­ri­ously ex­plored for taka­ful mainly due to: a) the com­plex­ity of op­er­a­tional is­sues and dif­fi­cul­ties in iden­ti­fy­ing a suit­able shariah con­tract to struc­ture the ar­range­ment, and b there was no ap­par­ent need for such a re­taka­ful prod­uct be­fore. This is just an ex­am­ple il­lus­trat­ing how forced in­no­va­tion spurred by re­quire­ments un­der the frame­work, could ac­cel­er­ate the evo­lu­tion of the fam­ily taka­ful in­dus­try. Sim­i­larly, the KPI re­quire­ments im­posed un­der the new agency BSC regime would cer­tainly im­pact the in­come of the ex­ist­ing agency force, more so for taka­ful agents con­sid­er­ing their cur­rent pro­duc­tiv­ity and per­sis­tency rate is still rel­a­tively low. The ball is now in taka­ful op­er­a­tors’ court, to iden­tify in­no­va­tive meth­ods and ap­proaches to en­sure the qual­ity of their agency force in­crease sig­nif­i­cantly in a short pe­riod of time, be it in terms of pro­duc­tiv­ity or pro­fes­sion­al­ism to en­able them to con­tinue to be in the in­dus­try. This can in­volve prod­uct in­no­va­tions, op­er­a­tional process up­grades as well as tech­nol­ogy driven solutions; most likely the mix­ture of them all. All this can be achieved by first em­brac­ing the prin­ci­pal ob­jec­tives of the LIFE Frame­work and be­liev­ing in the nec­es­sary changes re­quired for the in­dus­try. With­out a doubt, the re­quire­ments un­der the LIFE frame­work are in­deed chal­leng­ing but they are a col­lec­tion of care­fully thought out re­quire­ments, tak­ing into con­sid­er­a­tions var­i­ous dis­rup­tive fac­tors and trends. The in­dus­try may have no­ticed these fac­tors but the ma­jor­ity of us; may have de­cided to not act on them; to re­main in our com­fort zone. The re­al­ity is that mar­ket pres­sures are al­ready there, and it would con­tinue to be there if not in­creas­ing ex­po­nen­tially. The evo­lu­tion of the fam­ily taka­ful in­dus­try needs to kick in into the next gear, ac­cel­er­at­ing at a much faster pace, now more so than ever, con­sid­er­ing it is al­ready lag­ging be­hind com­pared to its con­ven­tional coun­ter­part. There is no bet­ter plat­form to achieve the evo­lu­tion at this junc­ture than what has been pre­sented in the LIFE Frame­work. Em­brac­ing it, would sys­tem­at­i­cally evolve a taka­ful op­er­a­tion to cope with the mar­ket con­di­tions, ful­fil reg­u­la­tory re­quire­ments, at the same time more fun­da­men­tally, be able to con­trib­ute and sup­port the larger na­tional agenda of pro­vid­ing cov­er­age to as many peo­ple as pos­si­ble – the very rea­son why taka­ful op­er­a­tors came into ex­is­tence at all.

Any fi­nan­cial strain or pres­sures; be it di­rectly or in­di­rectly would have a sig­nif­i­cant im­pact on the bot­tom line and cap­i­tal sol­vency con­di­tion of any young, small to medium size taka­ful operations.

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