American International Group Inc. is plotting its entry into Malaysia’s Islamic insurance market, lured by the country’s economic expansion and an industry that has grown more than fivefold in less than a decade.
The insurer, the world’s largest before being bailed out by the U.S. government in 2008, will start a Shariah-compliant reinsurance business by June and may eventually offer a fuller range of services, Antony Lee, chief executive officer at AIG’s Malaysian unit, said in a Feb. 11 interview in Kuala Lumpur. Rising affluence in the Southeast Asian nation will spur increased demand, he said.
Malaysia accounted for 11 percent of the $20 billion of Islamic insurance, or takaful, contributions in 2013, a Feb. 13 report from the Malaysia International Islamic Financial Centre shows. New business will increasingly come from outside the Middle East, said Hatim El-Tahir, director of the Islamic finance group at Deloitte & Touche in Bahrain.
New York-based AIG follows Munich Re and Swiss Re AG into the retakaful market in Malaysia, whose economy has had only three quarters of economic growth below 5 percent in the last four years.
“In line with the continuing expansion of the takaful business, the demand for retakaful is expected to expand between 15 percent and 20 percent on an annual basis,” Bahrain-based El-Tahir said in a Feb. 15 e-mail interview. “The geographical concentration in terms of global contribution is expected to shift from the Gulf Cooperation Council countries to the Asia- Pacific region by 2015.”
Mutual Assistance
The GCC consists of Saudi Arabia, United Arab Emirates, Kuwait, Bahrain, Qatar and Oman.
AIG’s Malaysian unit, which was set up in 1953 and has 14 offices, currently offers non-Islamic coverage for property, electronic equipment, medical and personal accidents, according to its website. The company’s venture into retakaful will help it assess the potential of the Shariah-compliant insurance market, according to Lee.
“There’s a whole segment of the market, which is the rural areas, that really is where there’s a much lower penetration rate,” he said. “As you get rural people moving into the cities, the affluence starts coming into it.”
Islamic insurance is based on the Koranic principle of mutual assistance. Policy holders contribute a sum of money to a common pool managed by the company, which is used to pay for claims and any excess is returned to customers. Retakaful is insurance for takaful companies and consists of Shariah insurers contributing to a fund managed by the retakaful operator, who’s paid a management fee.
Growth Rates
Malaysia has 11 takaful companies and the market recorded a compound annual growth rate of 18.7 percent in the four years through 2012, the MIFC estimated in its report. The nation has four Islamic reinsurers, according to the central bank’s website.
Global takaful contributions reached $24.3 billion last year from $4.7 billion in 2005, according to a separate estimate in the World Islamic Insurance Directory 2013 published by Takaful Re and the Middle East Insurance Review. Takaful still accounts for just 1.13 percent of the world’s Shariah-compliant financial assets, according to the MIFC report. A growing Islamic insurance industry will support demand for sales of sukuk, which have increased 0.7 percent to $3.9 billion this year.
The Bloomberg Takaful Index, which tracks the share prices of Islamic insurance companies worldwide, has fallen 1.4 percent this year, following a decline of 3.8 percent in 2013.
A key challenge for retakaful companies is their limited ability to compete with their larger non-Islamic counterparts for business that requires a bigger balance sheet, Munich Re Retakaful Chief Executive Officer Mohamed Rafick Khan Abdul Rahman said in a Feb. 14 interview in Kuala Lumpur.
‘Limited Capacity’
“There is limited capacity to insure things like airplanes and ships,” he said. “Conventional insurance has been in the market for the last 400 years. Retakaful is 15 to 25 years old. So we are pretty young, relatively speaking.”
AIG is cutting about 3 percent of its global employees after divesting units to help repay the $182.3 billion bailout in 2008, according to a Feb. 13 statement. Chief Executive Officer Robert Benmosche said last year the insurer is considering shifting some jobs to lower-cost locations including Malaysia and the Philippines.
Malaysia’s economy is forecast to expand 5 percent in 2014, after growing 4.7 percent last year, according to the median estimate of economists surveyed by Bloomberg. The government has a $444 billion 10-year plan to build roads, ports and power plants to elevate the country to developed-nation status by 2020.
Penetration Rates
Insurance premiums and contributions amount to 5 percent of Malaysia’s gross domestic product, according to the MIFC report. That compares with 10.1 percent and 11.5 percent in the more developed Asian economies of Japan and Hong Kong.
“Recent forecasts estimate that the takaful market will grow by over 10 percent a year for the next five to 10 years,” Marcel Papp, head of retakaful at Kuala Lumpur-based Swiss Re Retakaful, the Shariah-compliant unit of the world’s second- biggest reinsurer, said in a Feb 17 e-mail interview. “This in turn should help to grow the retakaful market by a similar percentage.”
–With assistance from Elffie Chew in Kuala Lumpur. Editors: Andrew Janes, Sandy Hendry