Takaful - Distribution Cost for Takaful and Conventional Insurance

Distribution cost means the expenses incurred to reach customers, explain the product, sell the protection, and complete the purchase process.

Conventional Insurance Distribution Cost

Conventional insurers may spend money on:

• Agents and brokers
• Sales commissions
• Branch offices
• Advertising and marketing
• Staff salaries
• Customer acquisition
• Product explanation
• Online platforms and applications

For example, if an insurer receives a RM1,000 premium but spends RM200 on agent commission, advertising, and administrative costs to obtain that customer, the distribution cost is RM200.

Simple Idea

Insurance distribution cost = Cost of finding the customer + explaining the product + making the sale

Takaful Distribution Cost

Takaful operators face many of the same costs as conventional insurers.

They also use:

• Agents
• Brokers
• Bancatakaful
• Branches
• Advertising
• Digital channels
• Sales staff

However, Takaful may have an additional education cost because customers may first need to understand:

• What Takaful is
• How it differs from conventional insurance
• What tabarru’ means
• What the Participants’ Risk Fund is
• How mutual risk sharing works
• Why the arrangement is Shari’ah compliant

Example

Conventional Insurance

An agent may spend:

20 minutes

explaining:

• Coverage
• Premium
• Exclusions
• Claims

Then the customer buys the policy.

Takaful

A Takaful agent may first spend time explaining:

• Takaful concept
• Mutual assistance
• Tabarru’
• Participants’ Risk Fund
• Difference from insurance

Then the agent must still explain:

• Coverage
• Contribution
• Exclusions
• Claims

Therefore, the sales process may take longer and require more education.

Why Takaful Distribution Cost Can Be Higher

The customer may already understand conventional insurance, but may not understand Takaful.

Therefore:

Insurance

→ Explain product

→ Sell product

Takaful

→ Explain Takaful concept

→ Explain why it is different

→ Explain product

→ Sell product

The extra stages can increase:

• Agent time
• Training costs
• Marketing costs
• Educational materials
• Customer-acquisition costs

Important Point

Takaful distribution cost is not always automatically higher.

If the operator uses:

• Mobile applications
• Online sales
• Bancatakaful
• Automated customer education
• Digital claims
• Social media marketing

it may reduce distribution costs substantially.

Simple Comparison

Conventional Insurance

Distribution cost

= Marketing + Agents + Branches + Sales + Administration

Takaful

Distribution cost

= Conventional-type distribution costs

+ Additional Takaful education cost

Easy Formula

Takaful Distribution Cost

= Customer Acquisition Cost + Product Selling Cost + Takaful Education Cost

This is why Takaful may initially be more expensive to distribute than conventional insurance, especially in markets where consumers are not familiar with the Takaful concept.