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
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.