Takaful - Key Challenges: Actuaries, Investments, Efficiency and Economies of Scale

• The Takaful industry faces several challenges that may affect its future growth and competitiveness.
• Important challenges include:
• Shortage of qualified actuaries who understand Takaful
• Limited Shari’ah-compliant investment opportunities
• Need to improve operational efficiency
• Difficulty achieving sufficient critical mass
• Need to benefit from economies of scale
• Need for continued market development and appropriate regulation

1. Need for More Muslim and Takaful-Specialised Actuaries

• An actuary is a professional who uses:
• Mathematics
• Statistics
• Probability
• Financial modelling
• Risk analysis

to estimate future risks and financial obligations.

• Actuaries play an important role in both insurance and Takaful.
• However, Takaful also requires professionals who understand:
• Shari’ah principles
• Tabarru‘
• Participants’ Risk Fund
• Surplus and deficit
• Qard
• Family and General Takaful structures

Simple Idea

Actuary = Person who calculates and analyses risk so that Takaful can be priced properly.

2. Why Actuaries Are Important for Pricing

• Takaful contributions should not be set randomly.
• The actuary estimates:
• Probability of claims
• Expected number of claims
• Expected size of claims
• Operating expenses
• Required reserves
• Possible future liabilities
• These calculations help determine an appropriate Takaful contribution.

Example – Motor Takaful

Suppose an actuary studies 10,000 drivers.

The actuary estimates:

• Expected claims = RM6 million
• Expenses and reserves = RM2 million
• Additional safety margin = RM1 million

Total amount required:

RM9 million

The operator therefore needs to collect enough contributions from the participants to support approximately RM9 million of expected requirements.

Simple Process

Risk data → Actuarial calculation → Appropriate contribution → Stronger Takaful fund

3. Why Takaful Actuaries Need to Understand the Spirit of Takaful

• A conventional actuary may understand risk pricing very well.
• However, a Takaful actuary should also understand that Takaful is based on:
• Mutual assistance
• Risk sharing
• Fairness
• Shari’ah compliance
• Pricing should therefore balance:
• Financial sustainability
• Affordability
• Fair treatment of participants
• Adequacy of the Participants’ Risk Fund

Example

If an operator charges contributions that are too low:

• Participants may initially be happy.
• However, the fund may later be unable to meet claims.
• Frequent deficits may occur.
• The operator may repeatedly need to provide Qard.

If contributions are too high:

• Takaful becomes unaffordable.
• Fewer people may participate.
• The purpose of mutual protection may be weakened.

Simple Idea

Good Takaful pricing = Affordable + Fair + Sufficient to support claims

4. Contributions Need to Be Invested

• Participants’ contributions are not necessarily kept entirely in cash.
• Part of the available funds may be invested in Shari’ah-compliant investments.
• Investment returns can help strengthen the relevant Takaful funds.

Investments Can Help With

• Future claims
• Reserves
• Long-term obligations
• Investment-related benefits
• Overall financial sustainability

Simple Process

Contributions → Takaful fund → Part invested → Shari’ah-compliant return generated

5. Investment Needs of General Takaful

• General Takaful normally covers risks such as:
• Motor
• Property
• Fire
• Marine
• Business risks
• Claims may arise relatively quickly.
• Therefore, General Takaful operators usually need investments that are:
• Relatively liquid
• Low risk
• Easily converted into cash

Example

• A Motor Takaful fund may have claims every day.
• The operator cannot place all available money into investments that cannot be sold for ten years.
• It needs enough liquid assets to pay claims when required.

Simple Idea

General Takaful → Claims may arise soon → Need more liquid investments

6. Investment Needs of Family Takaful

• Family Takaful may involve much longer periods.
• Participants may remain in a scheme for:
• 10 years
• 20 years
• 30 years or longer
• Therefore, Family Takaful operators may need suitable long-term Shari’ah-compliant investments.

Example

• Ahmad joins a 25-year Family Takaful plan.
• The operator needs investments that can generate appropriate returns over a long period.
• Long-term Sukuk may therefore be more suitable than keeping everything in short-term cash deposits.

Simple Idea

Family Takaful → Long-term obligations → Need suitable long-term investments

7. Limited Range of Shari’ah-Compliant Investment Instruments

• One challenge is that the range of available Shari’ah-compliant investment products may be more limited than the conventional investment market.
• Takaful operators cannot simply invest in every financial instrument.
• Investments must comply with Shari’ah.

Conventional Insurer May Invest In

• Conventional bonds
• Interest-bearing deposits
• Other conventional instruments

Takaful Operator Must Seek

• Sukuk
• Islamic money-market instruments
• Shari’ah-compliant equities
• Islamic funds
• Other approved Shari’ah-compliant assets

Simple Idea

Takaful has fewer investment choices because investments must comply with Shari’ah.

8. Why More Islamic Investment Products Are Needed

• A wider range of investment products would help Takaful operators better manage:
• Return
• Risk
• Liquidity
• Duration
• Future claims
• Different Takaful funds require different investment characteristics.

Example

A Family Takaful operator needs:

• Long-term investments

A Motor Takaful operator needs:

• More liquid short-term investments

Therefore, the Islamic capital market should provide a wider variety of:

• Short-term instruments
• Medium-term instruments
• Long-term Sukuk
• Sustainable investments
• Different risk levels

Simple Idea

More Shari’ah-compliant investment products → Better management of Takaful funds

9. Need to Improve Efficiency

• Another challenge is improving the operational efficiency of Takaful operators.
• Efficiency means providing protection and services while controlling costs.

Operators Need to Reduce

• Administrative expenses
• Distribution costs
• Claims-processing costs
• Manual processes
• Unnecessary overheads

Operators Can Improve

• Technology
• Digital distribution
• Automated claims
• Staff productivity
• Risk management
• Customer service

Example

Traditional claims process:

Customer visits branch → Paper documents → Manual assessment → Slow payment

Digital claims process:

Customer uploads documents online → Automated processing → Faster assessment → Faster payment

Simple Idea

Lower cost + Faster service = Greater efficiency

10. Critical Mass

• Critical mass means reaching a sufficiently large number of participants and contributions for the Takaful operation to become more efficient and financially sustainable.
• A very small Takaful operator may have difficulty because its fixed costs are spread over only a small number of participants.

Example – Small Operator

Suppose a Takaful operator has:

• 10,000 participants
• Annual fixed operating costs = RM10 million

Average fixed cost per participant:

RM10 million ÷ 10,000 = RM1,000

Now suppose the operator grows to:

• 100,000 participants

With the same RM10 million fixed cost:

RM10 million ÷ 100,000 = RM100 per participant

The cost per participant falls significantly.

Simple Idea

More participants → Costs spread across more people → Lower average cost

11. Economies of Scale

• Economies of scale occur when the average cost of providing a service decreases as the organisation becomes larger.
• Large Takaful operators may benefit because major fixed costs can be spread over many more participants.

Fixed Costs May Include

• IT systems
• Headquarters
• Regulatory compliance
• Shari’ah governance
• Actuarial systems
• Digital platforms
• Claims infrastructure

Example

A Takaful operator spends:

RM20 million on a digital platform

If it serves:

• 20,000 participants → RM1,000 cost per participant

If it serves:

• 200,000 participants → RM100 cost per participant

The same technology supports many more customers.

Simple Idea

Larger scale → Lower average cost → Greater competitiveness

genui{“learning_viz”:{“type_id”:“ECONOMIES_OF_SCALE”}}

12. Why Only a Few Operators May Currently Enjoy Economies of Scale

• Larger and established operators may already have:
• Large customer bases
• Strong distribution networks
• Established technology
• Strong brands
• Greater contribution income
• Smaller operators may have:
• Fewer participants
• Higher average costs
• Less bargaining power
• Smaller investment portfolios
• Higher distribution costs per participant

Simple Idea

Large operator → Costs spread widely

Small operator → Same types of costs spread over fewer participants

13. How Market Expansion Can Help

• As the Takaful market grows:
• More people participate
• Contribution pools become larger
• Risks can be spread across more participants
• Operators can achieve critical mass
• Average operating costs may fall

Example

A Takaful operator grows from:

50,000 participants → 500,000 participants

The operator may be able to:

• Spread technology costs
• Negotiate better service-provider rates
• Invest more efficiently
• Improve product pricing
• Strengthen risk diversification

Simple Idea

Market growth → Larger participant pool → Better efficiency and stronger risk sharing

14. Role of Proper Regulation

• Appropriate regulation is important for the healthy development of the Takaful industry.
• Regulators can help ensure:
• Financial stability
• Adequate capital
• Fair treatment of participants
• Proper fund management
• Effective Shari’ah governance
• Transparent product structures
• Strong risk management

Example

• A regulator may require Takaful operators to maintain sufficient capital and reserves.
• This reduces the risk that an operator becomes unable to meet its obligations.

Simple Idea

Good regulation → Stronger operators → Greater participant confidence

Overall Challenges

Human Capital Challenge

• Not enough specialised Takaful actuaries.
• Need more training and professional development.

Investment Challenge

• Limited range of Shari’ah-compliant investment products.
• Need more suitable short-, medium- and long-term instruments.

Efficiency Challenge

• Operators need to reduce costs and improve service.

Scale Challenge

• Operators need enough participants to achieve critical mass and economies of scale.

Regulatory Challenge

• Appropriate regulation is needed to support growth while protecting participants.

Easy Way to Remember

Actuaries

Calculate risk → Determine appropriate contribution

Investments

Contributions → Shari’ah-compliant investments → Returns help strengthen funds

Critical Mass

More participants → Larger pool → Greater efficiency

Economies of Scale

Larger operation → Lower average cost

Regulation

Proper rules → Stable and trustworthy Takaful industry

Simple Formula

Skilled Actuaries + More Islamic Investments + Greater Efficiency + Critical Mass + Economies of Scale + Proper Regulation = Stronger Takaful Industry