A Conceptual Model of Literature Review for Family Takaful (Islamic Life Insurance) Demand in Malaysia

Abstract

The growing significance of takaful industry (Islamic insurance) in Malaysia is expected to foster sustainable economic growth in Malaysia. Further to this, Malaysia is recorded to be the major player and one of the fastest takaful growth in Southeast Asia. As such, family takaful (Islamic life insurance) segment must be competitive and innovative to increase market penetration and compete with their conventional counterparts. This paper aims to propose a simple yet comprehensive conceptual model by identifying the main determinants that drive family takaful demand in Malaysia. An extensive review of literature available has been carried out to achieve the purpose. Several critical factors namely, agency system (al-wakalah), reputation of takaful operators, products and services, marketing and advertising of takaful products, are found to be the main determinants for family takaful demand. 1. Introduction Insurance as practised in the conventional financial system refers to a financial protection system that serves as a risk management strategy or tool, to reduce risk uncertainty and provides a planned financing technique that distribute losses. Whereas, takaful system (Islamic insurance) is known as a concept of mutual cooperation (ta’awun) and donation (tabarru’), where the risk is shared collectively and voluntarily by the group of participants to guarantee mutual protection of the members (Dusuki, 2011; Redzuan et al., 2009). The takaful term is derived from the Arabic word kafala, which mean ‘joint guarantee’ or ‘guaranteeing each other’ which also explained as a group of individuals that guarantees each other against potential loss or damage faced by anyone of them (see, Ahmad Musadik, 2010; Yusof, 2009). 2. Problem Statement The global takaful industry has witnessed impressive growth, particularly over the last five years. However, the performance of Malaysia takaful industry is still lags far behind in terms of total insurance market penetration and share. According to Takaful Ikhlas President and Chief Executive Officer Datuk Syed Moheeb Syed Kamarulzaman (2010), Malaysia’s penetration rate for takaful industry is around 10 percent, compared with overall conventional insurance industry which is stood at 40 percent. It has been highlighted that the primary target in takaful industry is the Muslim segment as the Muslim population in Malaysia comprises more than 60 percent of the total population (OSK Research Report, 2012). This fact represents a large untapped potential market for takaful industry in Malaysia. The Malaysian government entrusted Bank Negara Malaysia (Central Bank of Malaysia) to play an important role in promoting takaful businesses by providing better financial infrastructure. Hence, the takaful industry in Malaysia has been undergoing a steady growth and facing the rapid changes over the last five years. According to Bank Negara Malaysia Report (2011) the growth of this industry can be seen through its business performance. As shown in Table 1, the total of takaful business performance in term of gross contributions are increased from RM2,255 millions in 2007 to RM4,295 millions in 2011. For family takaful business, the gross contribution also increased from year to year. Similarly for general takaful business, the gross contributiosn are increased albeit only at a slower pace which was from RM768 millions in 2007 to RM1,600 millions in 2011 compared with performance of family takaful business. In short, takaful industry in Malaysia has strongly contributed by family takaful business compared with the general takaful business. Abstract The growing significance of takaful industry (Islamic insurance) in Malaysia is expected to foster sustainable economic growth in Malaysia. Further to this, Malaysia is recorded to be the major player and one of the fastest takaful growth in Southeast Asia. Abstract The growing significance of takaful industry (Islamic insurance) in Malaysia is expected to foster sustainable economic growth in Malaysia. Further to this, Malaysia is recorded to be the major player and one of the fastest takaful growth in Southeast Asia. 2. Problem Statement The global takaful industry has witnessed impressive growth, particularly over the last five years. However, the performance of Malaysia takaful industry is still lags far behind in terms of total insurance market penetration and share. According to Takaful Ikhlas President and Chief Executive Officer Datuk Syed Moheeb Syed Kamarulzaman (2010), Malaysia’s penetration rate for takaful industry is around 10 percent, compared with overall conventional insurance industry which is stood at 40 percent. It has been highlighted that the primary target in takaful industry is the Muslim segment as the Muslim population in Malaysia comprises more than 60 percent of the total population (OSK Research Report, 2012). This fact represents a large untapped potential market for takaful industry in Malaysia. The Malaysian government entrusted Bank Negara Malaysia (Central Bank of Malaysia) to play an important role in promoting takaful businesses by providing better financial infrastructure. Hence, the takaful industry in Malaysia has been undergoing a steady growth and facing the rapid changes over the last five years. According to Bank Negara Malaysia Report (2011) the growth of this industry can be seen through its business performance. As shown in Table 1, the total of takaful business performance in term of gross contributions are increased from RM2,255 millions in 2007 to RM4,295 millions in 2011. For family takaful business, the gross contribution also increased from year to year. Similarly for general takaful business, the gross contributiosn are increased albeit only at a slower pace which was from RM768 millions in 2007 to RM1,600 millions in 2011 compared with performance of family takaful business. In short, takaful industry in Malaysia has strongly contributed by family takaful business compared with the general takaful business. Ernst & Young World Takaful Report (2011) Malaysia shows a strong takaful growth among Southeast Asia countries. It is reported that there is a large untapped market that still exists with only 54 percent of the population having a life insurance or family takaful policies in 2010 (Abd. Kadir, 2011). By focusing into family takaful market, the family takaful penetration rate is merely 10 percent of the population in 2010 (OSK Research Report, 2012). Therefore, it can be argued that family takaful market is facing a lower market penetration compared to the conventional life insurance market in Malaysia. Many incentives are given by the Malaysian government in promoting family takaful such personal tax relief for takaful contribution from RM5,000 to RM6,000. In addition, new parliamentary initiatives from government such as the New Economic Model (NEM), Economic Transformation Program (ETP) and the Tenth Malaysian Plan would lead to the growth in demand for takaful products and services. Therefore, it is important to highlight why family takaful penetration is still low and what are the factors that influence the family takaful demand. 4.2.3 Product and Services There are number of studies focuses on both customers’ awareness and satisfaction of product and services in Islamic financial system (see, Naser et al., 1999; Ahmad & Haron, 2002; Bley & Kuehn, 2003; Dusuki & Abdullah, 2007; Al-Ajmi et al., Adnan, 2010; Mansour et al., 2010). While, a few of studies have focused only on the consumers preferences to Islamic banking products (see, Gerrard & Cunningham, 1997; Metawa & Almoswawi, 1998; Bley & Kuehn, 2003; Rammal & Zurbruegg, 2006). Meanwhile, some of the studies focused on consumers’ attitude, perception and knowledge of Islamic financial products (Yusof & Shamsuddin, 2003; Gait & Worthington, 2008). These studies have indicated that majority of customers prefer to choose products and services that are conform to Shariah (Naser et al., 1999; Ahmad & Haron, 2002; Al-Ajmi et al., 2009; www.ccsenet.org/ibr International Business Research Vol. 6, No. 3; 2013 214 Mansour et al., 2010; Rustam et al., 2011). In addition, a study by Bashir et al. (2011) has documented that easy to understand product is one of the critical reasons for choosing takaful operator.