Takaful - Lack of Product Innovation

In many countries where Takaful operates, the products offered are often very similar or almost identical to conventional insurance products. Instead of designing products that are uniquely based on the principles and objectives of Takaful, operators may simply copy an existing insurance product and adapt its terminology.

For example, a conventional motor insurance policy may be reproduced as a Motor Takaful product with almost the same:

• Coverage
• Exclusions
• Benefits
• Pricing structure
• Claims process
• Distribution method

The main visible changes may simply be:

Premium → Contribution

Policyholder → Participant

Insurance Fund → Participants’ Risk Fund

This is sometimes described as a “carbon copy” or “cut-and-paste” approach. The product may satisfy the basic Shari’ah requirements, but there may be little real innovation in how protection is designed or delivered.

The problem is that Takaful has its own distinctive principles, such as:

• Mutual assistance
• Risk sharing
• Tabarru’
• Participant welfare
• Shari’ah-compliant investment
• Social responsibility
• Financial inclusion

Therefore, Takaful products could potentially be designed in ways that reflect these principles more clearly instead of simply imitating conventional insurance.

Example

A conventional insurer offers standard health insurance.

A Takaful operator copies the same product and changes only the contractual structure.

This is product imitation.

A more innovative Takaful operator might instead develop a plan that includes:

• Preventive healthcare incentives
• Affordable protection for low-income families
• Surplus-sharing features
• Digital access for underserved communities
• Community-based mutual support

This would make the product more clearly aligned with the broader objectives of Takaful.

Lack of innovation can also make Takaful products difficult to distinguish from conventional insurance. If customers see no meaningful difference in benefits or service, they may simply compare the two products based on price.

This increases price competition and may reduce profitability.

Simple Idea

Same product + Same benefits + Same service → Customer compares mainly on price

For long-term success, Takaful operators need to move beyond simply copying conventional insurance products. They should develop products that are:

• More innovative
• More inclusive
• More customer-focused
• More clearly based on mutual assistance
• More responsive to new risks and social needs

Easy Formula

Copying Insurance Products → Little Differentiation → More Price Competition

Whereas:

Takaful Innovation + Shari’ah Values + Customer Needs = Stronger Product Differentiation

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

Takaful - Limited Public Awareness and Market Growth

A major challenge facing the Takaful industry is the lack of public awareness and understanding. Insufficient effort may be devoted to educating people about why financial protection is important, how Takaful works, and how it differs from conventional insurance. If consumers do not understand the concept, many may simply continue using conventional insurance or remain uninsured.

Without greater awareness, Takaful operators are forced to compete for the same limited group of existing customers. This creates what can be described as a static consumer pool, meaning the total number of people interested in Takaful does not grow significantly even though more operators enter the market.

Example of a Static Consumer Pool

Suppose there are only 100,000 customers who currently understand and are willing to buy Takaful.

If there are:

5 Takaful operators, each may compete for part of those 100,000 customers.

If the market later grows to:

10 Takaful operators

but the number of interested customers remains at 100,000, the operators are still competing for the same group.

Therefore:

More operators + Same number of customers = Greater competition

When many operators compete for a limited number of customers, they may begin competing mainly through price. Each operator may try to offer a lower contribution than its competitors in order to attract participants.

For example:

Operator A → RM1,000 contribution

Operator B → RM950

Operator C → RM900

If this price competition continues, contribution rates may become too low relative to claims, operating expenses, and reserves. This can reduce profitability and potentially weaken the financial sustainability of the Takaful funds.

Simple Idea

Static customer base → More operators competing for same customers → Price competition → Lower margins → Sustainability pressure

For the Takaful industry to grow successfully, market awareness must increase at the same time as the number of operators increases. It is not enough simply to establish more Takaful companies. The number of people who understand, trust, and are willing to purchase Takaful must also expand.

Consumer education should therefore explain:

• Why financial protection is important
• What Takaful means
• How mutual risk sharing works
• What tabarru’ is
• How the Participants’ Risk Fund operates
• How Takaful differs from conventional insurance
• Why Takaful is structured according to Shari’ah principles
• What benefits participants receive

Greater awareness can expand the market beyond consumers who already purchase Takaful for religious reasons. It may also attract customers who value ethical finance, mutual protection, transparency, social responsibility, and Shari’ah-compliant investment.

The source highlights the large gap between the size of the Muslim population and Takaful’s share of the global insurance market. It states that Muslims represent around 25% of the global population, while Takaful accounts for less than 0.5% of global insurance premiums.

This suggests that the potential market is much larger than the current level of Takaful participation described in the text.

Simple Illustration

Imagine a market of 1,000 people.

If:

250 are Muslims

but only a very small proportion purchase Takaful, then there is considerable potential to increase participation if awareness, affordability, accessibility, and trust improve.

The problem is therefore not simply the number of Takaful operators. It is also whether the industry can convert a larger part of the population into informed and willing participants.

Greater public awareness can also reduce excessive price competition. If the overall number of Takaful customers grows, operators do not have to fight as aggressively for the same small group.

For example:

Before education

10 operators compete for 100,000 customers.

After successful education and market development

10 operators compete in a market of 500,000 customers.

The larger customer base gives operators more opportunity to grow without relying mainly on price cutting.

Therefore, the long-term success of Takaful depends on both supply and demand.

Increasing supply means:

More Takaful operators + More products + Better distribution

Increasing demand means:

More awareness + Better understanding + Greater acceptance + More customers

Both must develop together.

Easy Way to Remember

More Takaful operators without more customers

→ Same consumer pool

→ Fierce competition

→ Lower prices

→ Lower margins

→ Sustainability problems

More Takaful operators + Greater public awareness

→ Larger customer base

→ Greater market penetration

→ Better growth opportunities

→ Stronger Takaful industry

Simple Formula

Consumer Education → Greater Awareness → Greater Acceptance → Larger Takaful Market → Less Pressure from Competing for the Same Customers → More Sustainable Growth

Takaful - Captive Customer Base and Pricing Advantage

Insurers that have access to a captive customer base through their own distribution network are usually in a stronger competitive position. A captive customer base means the insurer already has direct access to a group of potential customers, for example through its agents, branches, employer groups, or bancassurance arrangements with banks.

Because these customers are easier to reach, the insurer may spend less on advertising, commissions, and customer acquisition. This lowers the average distribution cost per policy and may allow the insurer to offer more competitive pricing while still maintaining an acceptable profit margin.

Example

Suppose Insurer A sells insurance through a bank with 1 million existing customers.

The bank can directly offer motor, home, or life insurance to these customers.

Insurer A therefore does not need to spend as much money finding new customers.

If its distribution cost is low, it may be able to offer a motor policy for:

RM900

and still make a reasonable profit.

By contrast, Insurer B has no dedicated distribution network and no bank partnership. It must compete for customers through advertisements, brokers, comparison websites, and independent agents.

This may increase:

• Marketing expenses
• Agent commissions
• Customer acquisition costs
• Price competition

Insurer B may therefore have to reduce its price simply to attract customers.

For example:

Normal profitable price = RM950

But because competitors are offering RM900, Insurer B may reduce its price to:

RM880

If claims and operating costs remain high, its profit margin becomes very small.

This can create a sustainability problem. If the insurer continually lowers prices to win customers but cannot reduce claims or operating costs, it may eventually become financially unsustainable.

Simple Idea

Captive customer base → Easier access to customers → Lower distribution cost → Better pricing flexibility

Whereas:

No dedicated distribution network → Harder to attract customers → More price competition → Lower profit margins → Sustainability risk

Easy Example

Insurer with bank partnership

Bank customer needs a car loan

→ Bank offers motor insurance immediately

→ Easy sale

→ Lower acquisition cost

Insurer without bank partnership

Must advertise and compete for the same customer

→ Higher acquisition cost

→ Greater pressure to cut prices

Simple Formula

Strong Distribution Network + Captive Customers = Lower Customer Acquisition Cost + Better Pricing Power

Weak Distribution Network = Higher Competition + Price Cutting + Lower Profitability

Takaful - Mutual vs Cooperative vs Affinity Group Takaful

Concise Overview

Mutual Takaful, Cooperative Takaful, and Affinity Group Takaful all use the idea of members helping one another through risk pooling. The main difference is how the group is organised and why the members are connected.

Mutual Takaful is organised primarily to provide protection to its members. Cooperative Takaful is offered through a cooperative that may provide many other services besides Takaful. Affinity Group Takaful provides protection to people who already belong to a particular group because they share an occupation, employer, profession, community, or other common connection.

1. Mutual Takaful

A mutual Takaful organisation is established mainly for the purpose of providing mutual protection to its members. The participants collectively contribute to a common risk pool and help compensate members who suffer covered losses.

There are generally no external shareholders whose main objective is to maximise investment returns. The organisation is operated primarily for the benefit of its members.

Example

Suppose 50,000 members establish a mutual Takaful organisation.

Each member contributes to a common Participants’ Risk Fund. If some members suffer covered losses, claims are paid from the fund.

Any surplus is dealt with according to the mutual arrangement and applicable rules, rather than being primarily generated for outside shareholders.

Simple Idea

Mutual Takaful = Members collectively protect themselves

Members → Contributions → Common Risk Fund → Claims for Members

2. Cooperative Takaful

A cooperative is an organisation established by members to provide goods or services for their common benefit.

Takaful may be only one of several services offered by the cooperative.

For example, a farmers’ cooperative may provide:

• Agricultural financing
• Fertiliser and equipment
• Training
• Marketing assistance
• Savings services
• Takaful protection

The cooperative can therefore incorporate Takaful protection into its existing services.

Example

Suppose a farming cooperative has 20,000 farmers.

The cooperative already helps members obtain seeds, equipment, financing, and agricultural training.

It could also arrange:

• Crop Takaful
• Livestock Takaful
• Farm equipment protection
• Family Takaful

Because the farmers are already members of the cooperative, the organisation does not have to find every participant from the general public.

Simple Idea

Cooperative Takaful = Cooperative members receive Takaful as one of several cooperative services

3. Affinity Group Takaful

An affinity group consists of people who already share a particular relationship, characteristic, occupation, or interest.

The group itself does not necessarily exist mainly to provide Takaful. Instead, Takaful is arranged because the organisation already has access to a clearly identifiable group of members.

Affinity groups could include:

• Employees of one company
• Members of a professional association
• University alumni
• Members of a mosque or community organisation
• Farmers’ associations
• Members of a trade or business association

Example

Suppose an accountants’ professional association has 30,000 members.

The association could arrange a Family Takaful or medical Takaful plan specifically for its members.

Instead of the Takaful operator trying to find 30,000 customers individually, it can reach them through the association.

Simple Idea

Affinity Group Takaful = An existing group receives Takaful because its members already share a common connection

Key Difference

Mutual Takaful

The organisation exists mainly to provide mutual protection.

Purpose → Takaful itself

Cooperative Takaful

The cooperative exists to provide many services to its members, and Takaful is one of those services.

Purpose → Multiple member services, including Takaful

Affinity Group Takaful

The group already exists because its members share a common relationship or interest, and Takaful is offered to that existing group.

Purpose → Existing common connection + Takaful offered as an additional benefit

Example Comparing All Three

Mutual

10,000 people establish an organisation specifically to provide mutual protection.

Members → Mutual Takaful organisation → Protection

Cooperative

10,000 farmers establish a cooperative for farming support, financing, purchasing, and marketing. The cooperative later adds Crop Takaful.

Farmers → Cooperative → Many services + Takaful

Affinity Group

10,000 teachers already belong to a teachers’ association. A Takaful plan is arranged specifically for those teachers.

Teachers → Professional association → Group Takaful protection

Why Cooperative and Affinity Models Can Reduce Distribution Cost

A major advantage is that these organisations already have an existing membership base.

A normal Takaful operator might have to spend heavily on:

• Advertising
• Agents
• Marketing
• Customer acquisition
• Customer education

A cooperative or affinity group already knows who its members are and already has ways of communicating with them.

Example

A Takaful operator wants 20,000 customers.

Without an existing group:

Operator → Advertising → Agents → Find customers individually

Through a cooperative:

Operator/Cooperative → Existing 20,000 members

Therefore:

Existing Membership → Easier Distribution → Lower Customer Acquisition Cost

Governance Challenge

Although cooperative and affinity-group structures can make Takaful more accessible, Takaful remains a complicated financial activity.

The organisation must properly manage:

• Contributions
• Participants’ Risk Fund
• Underwriting
• Claims
• Investments
• Reserves
• Surplus and deficits
• Shari’ah compliance
• Solvency
• Accounting
• Risk management

For example, a cooperative cannot simply mix money from its Takaful risk fund with money used for its farming, retail, or financing activities. Proper fund separation and governance are necessary.

Easy Way to Remember

Mutual Takaful

= Members come together for protection

Cooperative Takaful

= Members come together for many services, including protection

Affinity Group Takaful

= People are already connected by something else, and Takaful is offered to them as a group

Simple Formula

Mutual = Members + Mutual Protection

Cooperative = Members + Multiple Cooperative Services + Takaful

Affinity Group = Existing Common Connection + Group Takaful

Takaful - Unfriendly Regulations and Governance Challenges

Concise Overview

Takaful needs innovation in order to grow and remain competitive. However, innovation can be restricted by regulations that were originally designed for conventional insurance and may not properly accommodate the special structure of Takaful. At the same time, management teams that focus heavily on shareholder profit may sometimes compromise product design, affordability, or service to participants. One possible alternative is to provide Takaful through mutual organisations, cooperatives, or affinity groups, although these structures require strong governance because Takaful is complex to manage.

Regulations Can Restrict Takaful Innovation

Takaful operators need to develop new products, distribution methods, and operating structures to meet changing customer needs. However, some regulations may unintentionally make innovation difficult.

These regulations may not be deliberately hostile to Takaful. Instead, they may have been designed mainly around the structure of conventional insurance and may therefore not fully recognise Takaful concepts such as:

• Participants’ Risk Funds
• Tabarru’
• Mutual risk sharing
• Separation of participants’ and shareholders’ funds
• Surplus distribution
• Qard arrangements
• Shari’ah governance

For example, a regulator may impose the same capital, organisational, or licensing requirements on a small community-based Takaful scheme as on a large commercial insurer. This may make it too expensive for smaller or innovative Takaful models to enter the market.

Simple Idea

Regulation designed for conventional insurance → May not fit Takaful structure → Innovation becomes more difficult

Profit-Focused Management Can Also Limit Innovation

Another challenge may come from the management of commercial Takaful companies. Since shareholders provide capital, management is normally expected to generate an acceptable return for them.

This objective is understandable because a Takaful operator must remain financially sustainable. However, if management focuses too strongly on shareholder profits, it may prioritise products and customers that generate the highest financial returns.

For example, a Takaful operator may have the choice between developing:

Product A

• High-income customers
• Large contributions
• High profit margins

and

Product B

• Low-income participants
• Small contributions
• Higher distribution costs
• Lower profit margins

A strongly profit-oriented management team may choose Product A even if Product B would provide greater social benefit.

This may create compromises in:

• Product affordability
• Coverage
• Customer service
• Claims service
• Access for low-income groups
• Innovation aimed at underserved communities

Simple Idea

Too much focus on shareholder return → Participant needs may receive less priority

Possibility of Mutual Takaful

Some regulators may be willing to support the establishment of mutual Takaful organisations.

In a mutual structure, the organisation is essentially operated for the benefit of its members rather than outside shareholders. Participants collectively have a stronger interest in the organisation and its financial results.

This may allow the Takaful arrangement to place greater emphasis on:

• Mutual protection
• Participant welfare
• Affordable coverage
• Long-term sustainability

rather than maximising shareholder returns.

Takaful Through Cooperatives

Another possible model is to embed Takaful within a cooperative.

A cooperative is an organisation owned or operated for the benefit of its members. It may provide several services, such as:

• Savings
• Financing
• Agricultural support
• Purchasing services
• Healthcare assistance
• Takaful protection

Takaful becomes only one service offered to members.

Example

Suppose a farming cooperative has 20,000 members.

The cooperative already provides:

• Agricultural supplies
• Financing
• Training
• Marketing support

It could also establish a Takaful arrangement for:

• Crop losses
• Livestock losses
• Death or disability
• Farm equipment

Because the cooperative already has an established membership, it may be able to distribute Takaful more cheaply than a separate commercial operator.

Takaful Through Affinity Groups

An affinity group is a group of people connected by a common relationship or interest.

Examples include:

• Employees of the same company
• Members of a professional association
• Members of a mosque or community
• Farmers’ associations
• Trade unions or occupational groups
• University alumni
• Members of a cooperative

A Takaful arrangement could be offered specifically to members of that group.

Example

A professional association has 50,000 members.

Instead of every member individually searching for Family Takaful, the association could arrange a group Takaful plan for its members.

This can reduce:

• Marketing costs
• Customer acquisition costs
• Distribution expenses

because the group already has direct access to its members.

Why These Models May Be Attractive

Mutuals, cooperatives, and affinity groups may help Takaful because they already have:

• Existing members
• Trust relationships
• Distribution channels
• Shared interests
• Knowledge of member needs

This can reduce some of the high distribution costs faced by conventional commercial Takaful operators.

Simple Formula

Existing Membership + Existing Trust + Shared Needs = Lower Takaful Distribution Cost

Governance Becomes a Major Challenge

Although these models may be attractive, they create significant governance challenges.

A cooperative may offer many different services besides Takaful. The organisation must therefore ensure that Takaful funds and activities are properly managed and not mixed improperly with other activities.

For example, a cooperative may operate:

• A grocery business
• Financing services
• Agricultural services
• Takaful

The Participants’ Risk Fund should not simply be treated as general cooperative money that can be used to finance unrelated activities.

The organisation therefore needs clear rules regarding:

• Separation of Takaful funds
• Claims management
• Investment of participants’ money
• Shari’ah compliance
• Risk management
• Actuarial valuation
• Accounting
• Solvency
• Internal controls
• Management responsibilities

Why Takaful Governance Is Complex

Takaful is not simply about collecting money and paying claims.

The organisation must manage:

Contributions → Risk pooling → Underwriting → Investments → Reserves → Claims → Surplus or deficit → Shari’ah compliance

Each stage requires specialist knowledge.

For example, if a cooperative starts Takaful without proper actuarial expertise, it may charge contributions that are too low.

Suppose:

Annual contributions collected = RM5 million

but expected claims and expenses eventually reach:

RM8 million

The Takaful fund would suffer a deficit.

Therefore, good intentions alone are not enough. The scheme must also have professional risk management and governance.

Main Challenge

The industry therefore faces a balance between three objectives:

Innovation

Financial Sustainability

Participant Protection

Too much regulation may prevent innovation, while too much commercial pressure may reduce the social purpose of Takaful.

Easy Way to Remember

Unfriendly regulations

= Rules may not properly fit the Takaful structure.

Profit-focused management

= May prioritise shareholder returns over participant needs.

Mutuals / cooperatives / affinity groups

= Possible alternative ways to provide Takaful.

Main challenge

= Strong governance is needed because Takaful is financially and operationally complex.

Simple Formula

Supportive Regulation + Innovation + Strong Governance + Participant Focus = Sustainable Takaful Development

Takaful - Higher Operating and Distribution Costs

Concise Overview

Insurance has traditionally been a product that is sold rather than actively bought by customers. This means insurers must spend heavily on agents, branches, marketing, bancassurance arrangements, and other distribution channels to reach customers. Takaful faces an even greater challenge because operators must often educate customers about Takaful and its Shari’ah principles before selling the actual product, which can increase operating and distribution costs.

Insurance Is Usually “Sold Rather Than Bought”

Many consumers do not actively search for insurance unless they have a specific need or legal obligation. Therefore, insurers often have to approach customers, explain why protection is necessary, and persuade them to purchase a policy.

This makes success strongly dependent on having access to customers and carrying out prudent underwriting, meaning that the insurer must carefully assess and price risks so that the premiums collected are sufficient to cover expected claims and expenses.

Importance of a Large Distribution Network

Profitable insurers often have a large distribution network, such as:

• Agents
• Brokers
• Branches
• Online platforms
• Bank partnerships

A large network allows the insurer to reach more potential customers and generate a greater volume of business.

For example, an insurer with thousands of agents and hundreds of branches can reach far more customers than an insurer operating through only a few offices.

Bancassurance Gives Access to Bank Customers

Another important distribution method is bancassurance, where an insurance company sells its products through a bank.

The insurer benefits because the bank already has a large number of customers. Instead of finding every customer independently, the insurer can market protection products directly to people who already use the bank’s services.

For example:

Bank provides home loan → Customer also offered house insurance

This gives the insurer access to a ready-made or captive customer base.

Captive Customer Base Can Improve Pricing

A captive customer base means the insurer already has relatively direct access to customers through its distribution network.

Because customer acquisition may be easier and cheaper, the insurer may be able to offer more competitive pricing while still maintaining profitability.

Simple Idea

Large distribution network → More customers → Lower average acquisition cost → Better pricing ability

Insurers Without Distribution Networks Face Greater Competition

An insurer that does not have its own strong distribution network may have to compete heavily for customers.

It may need to:

• Reduce premiums
• Pay higher commissions to intermediaries
• Spend more on advertising
• Offer discounts
• Compete through price

This can reduce profit margins and make the business more difficult to sustain.

Simple Idea

Weak distribution access → Greater price competition → Lower profit margin → Sustainability problem

General Insurance Often Depends on Compulsory Products

For many general insurers, a significant amount of business comes from products that customers are required to purchase, such as compulsory motor insurance or certain legally required medical or liability protection.

These products generate a regular flow of customers because people may have no choice but to obtain the required coverage.

For example:

Own a vehicle → Motor insurance required → Automatic demand for the product

Problem of Commoditised Products

Products such as basic motor insurance can become commoditised products.

A commoditised product is one where customers see very little difference between the products offered by different insurers.

For example, if ten insurers offer almost the same basic motor protection, customers may simply compare:

Insurer A = RM900

Insurer B = RM850

Insurer C = RM820

The customer may choose the cheapest option.

When products are difficult to differentiate, insurers often compete mainly on price. Strong price competition can reduce premiums and profit margins, making it more difficult for insurers to earn sustainable profits.

Simple Formula

Similar products → Price competition → Lower margins → Greater profitability pressure

High Distribution Cost of Insurance

Insurance generally requires significant effort to sell. Insurers must spend money on:

• Customer acquisition
• Advertising
• Agent commissions
• Branches
• Staff
• Product explanation
• Administration
• Sales support

Therefore, distribution can represent a major part of the insurer’s operating expenses.

Can Technology Reduce Distribution Costs?

Technology-based companies have attempted to replace traditional distribution channels with:

• Mobile applications
• Websites
• Online quotations
• Automated underwriting
• Digital payments
• Online claims
• Artificial intelligence
• Peer-to-peer platforms

The objective is to reduce dependence on expensive physical branches, agents, and manual processes.

Peer-to-Peer Insurance and Profitability

Some peer-to-peer insurance businesses initially achieved rapid growth because technology allowed them to attract customers quickly.

However, growth does not necessarily mean profitability.

A company may have many customers but still lose money because of:

• High marketing costs
• Claims
• Technology development costs
• Administration
• Fraud
• Customer acquisition expenses

Therefore, some digital insurance pioneers have yet to demonstrate that their models can remain profitable and sustainable over the long term.

Simple Idea

Rapid growth ≠ Sustainable profit

Additional Challenge for Takaful

Takaful faces an even greater distribution challenge than conventional insurance.

A conventional insurer mainly needs to explain:

• The product
• The premium
• The coverage
• The exclusions
• The claims procedure

A Takaful operator may first need to explain:

• What Takaful is
• How Takaful differs from conventional insurance
• Mutual risk sharing
• Tabarru’
• Participants’ Risk Fund
• Shari’ah compliance

Only after this education can the operator begin selling the actual Takaful product.

Example

Conventional Insurance

Agent tells Ahmad:

“This motor policy costs RM1,000 and covers these risks.”

The agent mainly explains the product.

Takaful

The Takaful agent may first explain:

“Takaful is based on mutual assistance. Participants contribute through tabarru’ into a common risk fund, and claims are paid from this fund.”

Then the agent explains:

• Contribution amount
• Coverage
• Exclusions
• Claims procedure

Therefore:

Takaful requires product selling + Takaful education

Why Takaful Distribution Costs Can Be Higher

This additional educational requirement can increase:

• Agent training costs
• Customer education expenses
• Marketing costs
• Sales time
• Communication costs
• Customer acquisition costs

Therefore, Takaful may face a higher distribution cost than conventional insurance, particularly in markets where customers are unfamiliar with the Takaful concept.

Learning From Traditional Insurers and Fintech

To become more successful, Takaful operators should learn from both traditional insurers and technology-based insurers.

Traditional brick-and-mortar insurers provide lessons in:

• Distribution
• Underwriting
• Claims management
• Customer service
• Risk management

Fintech and digital insurers provide lessons in:

• Online distribution
• Automation
• Data analytics
• Digital customer service
• Lower-cost access to consumers

Takaful Should Not Simply Copy Insurance

A simple “cut-and-paste” approach is unlikely to be successful.

Takaful should not merely copy a conventional insurance product and replace:

Premium → Contribution

Policyholder → Participant

Instead, products should reflect genuine Takaful principles such as:

• Mutual assistance
• Risk sharing
• Tabarru’
• Shari’ah-compliant investment
• Transparent fund management
• Proper separation of participants’ and shareholders’ funds

Technology as a Possible Solution

Increasing attention is therefore being given to using technology to transform both Takaful and conventional insurance.

Technology can potentially:

• Reduce distribution costs
• Reach more customers
• Provide cheaper customer education
• Simplify product purchase
• Automate underwriting
• Speed up claims
• Improve customer experience
• Extend protection to underserved populations

However, technology alone cannot guarantee success. The underlying product must still be well designed, financially sustainable, competitive, and suitable for customers.

Easy Way to Remember

Insurance problem:

High distribution cost because insurance usually has to be sold.

Takaful problem:

High distribution cost + additional customer education

Commoditised products:

Similar products → customers compare mainly on price → lower profit margins

Possible solution:

Technology + Efficient Distribution + Better Product Design + Customer Education

Simple Formula

Strong Distribution + Prudent Underwriting + Competitive Product = Better Insurance Sustainability

For Takaful:

Strong Distribution + Customer Education + Technology + Genuine Takaful Innovation = Better Takaful Sustainability

Takaful - Why Customers See Takaful as Similar to Conventional Insurance

Many customers view Takaful and conventional insurance as almost the same because both provide financial protection against specified risks. From the customer’s perspective, the process can look very similar: they make a payment, receive a protection plan, and expect compensation if a covered event occurs.

The main difference is often hidden in the underlying contract and financial structure, which customers may not fully understand. In conventional insurance, the policyholder generally transfers the insured risk to the insurance company in exchange for a premium. In Takaful, participants contribute to a common risk fund and mutually share the financial consequences of covered losses.

Customers may also not understand the different relationships among the parties in Takaful. The participants contribute to the Participants’ Risk Fund, while the Takaful operator manages the fund according to the agreed Shari’ah contract. The operator is therefore not simply acting in the same way as a conventional insurer that directly assumes the insured risk.

For example, Ahmad may see both Motor Insurance and Motor Takaful as products that protect his car. He may only notice that one requires a premium while the other requires a contribution. Unless the Takaful operator explains concepts such as tabarru’, mutual risk sharing, fund separation, and the role of the operator, Ahmad may assume that the two products are basically identical.

This creates an important consumer-education challenge for the Takaful industry. Operators need to explain that although the practical protection received may be similar, the contractual relationship, treatment of funds, risk-sharing mechanism, and investment rules are different.

Simple Idea

Customers often see the same outcome: financial protection.

But underneath:

Conventional Insurance = Risk transfer to insurer

Takaful = Mutual risk sharing among participants + Shari’ah-compliant fund management

Takaful - Peer-to-Peer Insurance

Peer-to-peer (P2P) insurance is a model where a group of individuals with similar risks contribute money into a common pool, and claims are paid from that pool. Technology is usually used to connect the members, collect payments, manage claims, and reduce the need for traditional agents or branches.

For example, suppose 1,000 drivers each contribute RM1,000 into a common pool.

The total pool becomes:

1,000 × RM1,000 = RM1 million

If some members suffer covered accidents, their claims are paid from the common pool.

Simple Idea

Many people contribute → Common pool → Losses of some members are paid from the pool

P2P insurance is similar to the basic idea of risk pooling because members collectively share the financial burden of losses. Instead of each person bearing a large loss individually, the group helps absorb the losses suffered by some members.

Technology is important in P2P insurance because customers may join through an app or website rather than through traditional insurance agents. This can potentially reduce:

• Agent commissions
• Branch costs
• Administrative expenses
• Paperwork
• Customer acquisition costs

However, P2P insurance is not automatically profitable. A company may attract many customers but still suffer losses if:

• Claims are too high
• Marketing costs are high
• Technology costs are high
• Fraud is not controlled
• The customer pool is too small
• Operating expenses exceed income

Therefore:

Fast customer growth ≠ Guaranteed profitability

Relationship with Takaful

P2P insurance has some similarities with Takaful because both involve pooling and sharing risks among members.

However, Takaful must also satisfy additional Shari’ah requirements such as:

• Tabarru’
• Mutual assistance
• Shari’ah-compliant investments
• Proper separation of funds
• Shari’ah governance

Therefore, a P2P platform is not automatically Takaful merely because people share risks.

Example of P2P Takaful

Suppose 5,000 participants join a digital Takaful platform.

Each contributes:

RM500

Part of the contribution goes into a Participants’ Risk Fund.

If one participant suffers a covered loss, payment is made from that common fund.

Technology can then be used for:

• Registration
• Contribution payments
• Claims submission
• Customer education
• Fraud detection
• Claim tracking

Easy Way to Remember

Peer-to-Peer Insurance = People share risk through a common pool, usually supported by technology

Peer-to-Peer Takaful = P2P risk sharing + Shari’ah-compliant structure

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.