Zurich Malaysia highlights takaful for climate-vulnerable communities

Zurich Insurance Group plans to offer more products and services in Malaysia to help build the south-east Asian country’s resilience to extreme weather events. These products include takaful, a type of Islamic insurance.

As climate change intensifies disaster risks, innovative solutions like takaful are needed to protect vulnerable populations, according to a webinar hosted by the Insurance Development Forum, Global Shield Financing Facility and the World Bank Disaster Risk Financing and Insurance Program.

Shamsul Azman, chief executive of Zurich General Takaful Malaysia Berhad, said floods have become the main environmental risk in Malaysia.

“Malaysia has been very fortunate in terms of major climate disasters. However, for the past few years, we have been hit by floods. It’s a major issue in the country and, as an industry, we are struggling to come up with a model that will enable us to offer the right protection,” Azman said.

Flooding is now Malaysia’s greatest environmental risk Cloudyew/Alamy Stock Photo

Massive floods in December 2021 and January 2022 affected 11 of Malaysia’s 13 states, leading to the largest insurance claims payout for a flood event in a decade, according to a survey by Zurich Malaysia.

However, of the nearly $2bn in flood damage, only 36% was covered by insurance and takaful. Such low levels of insurance penetration are a feature of the market despite the fact Malaysia faces annual, cyclical monsoon seasons.

“Together with the regulators, we have been exploring various models, as well as various potential solutions. We have not come to a conclusion yet on how to deal with this. It’s a work in progress,” Azman said.

The 2021 major flood event incurred economic losses equivalent to 0.4% of Malaysia’s GDP. In 2022, flood events caused total losses equating to 0.03% of GDP.

Evolution of takaful

From the Arabic word for “guaranteeing each other”, takaful is designed to meet sharia guidelines.

Malaysia’s takaful market began with the Takaful Act of 1984 and has since evolved as a component of the country’s Islamic financial system, which operates in parallel with its conventional financial system. The first takaful operator was established in 1985.

This had a composite licence, Azman said, meaning it had both family and general operations. This changed in 2017, when takaful operators were required to separate their composite licences into family (life) and general (non-life).

There are 11 family takaful operators in Malaysia at present but only four general takaful operators.

Malaysia’s insurance sector is regulated by the country’s central bank – Bank Negara Malaysia (BNM) – as part of its full supervision of the financial industry, Azman continued. The latest evolution of its takaful insurance sector includes retakaful (reinsurance). All non-life insurers in Malaysia, including takaful operators, have adopted the Malaysian Financial Reporting Standard 17, equivalent to the international IFRS 17, effective from January 1, 2023.

Shamsul Azman, chief executive, Zurich General Takaful Malaysia Berhad Zurich

In contrast to conventional insurance policies, where policyholders pay an insurance company to insure them against risk, in takaful the contract participants are both the insurer and the insured. To manage the takaful contract and coverage, several models of contracts are used: wakalah (agency), mudharabah (profit-sharing) and a hybrid of the two.

In Malaysia, most insurance business follows the wakalah model, including Zurich.

“We ensure there is compliance with all aspects of sharia [guidelines],” Azman said. “For example, in underwriting we have permissible risks as well as rejected risks, but there is also allowance for mixed risk, whereby a certain percentage of non-permissible risk is considered permissible. This means the sharia requirements are safeguarded by our takaful operational model.”

“We ensure there is compliance with all aspects of sharia [guidelines]. For example, in underwriting we have permissible risks as well as rejected risks, but there is also allowance for mixed risk, whereby a certain percentage of non-permissible risk is considered permissible”
_{Shamsul Azman
Zurich General Takaful Malaysia Berhad}

The model includes a Participants Risk Fund (PRF) based on a tabarru’ (contribution) contract. A participant appoints a takaful operator to manage the PRF in return for a fee, which is an agreed percentage of the contribution. The contribution is credited to the PRF to be used for claims purposes.

Any surplus – after deducting claims, retakaful, reserve and related expenses – is distributed between participants and the takaful operator. That means the takaful operator takes some of the surplus as its “performance fee”, which is based on ju’alah (contract), and the remaining amount is distributed to the participants based on hibah (gift). If there is a deficit, then the takaful operator provides qard (interest-free loan) to the PRF.

According to AM Best, the total non-life gross premiums written in Malaysia in 2022 saw a 11.7% increase year on year, reaching Ringgit24.5bn ($5.3bn). Of this growth, 31% was from the general takaful segment.

A challenge to growing takaful is not only awareness that insurers offer it, but also the perception of what it is, Azman said. “There is a widespread belief takaful at the retail end is only meant for Muslims and, as an industry, we have been trying to remove that perception.”

The industry is guiding the growth of takaful alongside developments in digitalisation as well as trying to achieve financial inclusion, Azman continued, in line with the BNM’s focus on insurance addressing the needs of the underserved and the unserved. In addition, it needs to take a “values-based approach” to climate risk and sustainability, he added.