Takaful - Price Competition and Unsustainable Business Model

Takaful operators do not only compete with other Takaful operators; they also compete with conventional insurance companies. Because customers often view Takaful and insurance as providing similar protection, price can become an important factor when they choose between products.

When many operators compete for the same limited group of customers, they may try to attract business by reducing Takaful contribution rates. Conventional insurers may also lower their premiums, forcing Takaful operators to respond with even more competitive pricing.

The problem is that Takaful operators already face relatively high costs, including distribution expenses, customer education, Shari’ah governance, administration, underwriting, technology, and claims management. If contribution rates are continuously reduced while these costs remain high, the operator’s financial margin becomes very small.

Example

Suppose the appropriate contribution for a Motor Takaful product is:

RM1,000

because the operator expects:

• Claims = RM700
• Distribution and administration = RM200
• Financial buffer = RM100

However, because competitors charge only RM900, the operator reduces its contribution to RM850.

The operator may attract more customers, but:

RM850 contribution < RM900 expected claims and expenses

This means the business is being priced at an unsustainable level.

Repeated underpricing can also weaken the Participants’ Risk Fund. If contributions collected are insufficient to cover claims, reserves, and related expenses, the fund may experience recurring deficits and may require financial support such as qard from the shareholders’ fund, depending on the Takaful structure.

Therefore, competing mainly on price can create an unsustainable business model. An operator may increase its number of customers but still fail to generate sufficient income to cover its long-term costs and claims.

Simple Idea

More competition → Lower contribution rates → Lower margins → Greater risk of deficits → Sustainability problem

Takaful operators therefore need to compete on more than just price. They can differentiate themselves through better customer service, efficient claims handling, innovative products, digital services, strong Shari’ah governance, and products that genuinely meet customer needs.

Easy Formula

Takaful vs Takaful + Takaful vs Insurance → Strong Price Competition

If:

Price Competition + High Operating Costs + Underpricing = Unsustainable Takaful Business

A more sustainable approach is:

Fair Pricing + Good Underwriting + Efficient Costs + Better Service + Product Differentiation = Sustainable Takaful