Business Takaful

Source: The Edge Daily, 19th May 2008

When the fifth largest global insurer — Aviva Plc — bought a 49% stake in the CIMB Group’s assurance and takaful businesses last July for close to RM1 billion, many within the industry felt it was a high price to pay.

But what’s interesting about the deal is that it allowed Aviva to dip its fingers into the takaful business, which many insurers are eyeing. So far, the segment is restricted to only nine players.
The takaful business offers opportunities not only for the domestic market but also for global players. CIMB-Aviva saw this potential and has already got a head start by applying and receiving the International Currency Business Unit (ICBU) licence from Bank Negara Malaysia to enable it to sell its takaful products overseas.

“We got our international takaful licence late last year. This means we can effectively do takaful insurance in other countries and earnings made are tax exempt. We haven’t used the licence yet but it is a matter of finding the right opportunity. We are looking… we will always look at new opportunities if they make good economic sense to us,” says Simon Machell, Aviva’s Asia-Pacific chief executive based in Singapore.

CIMB-Aviva’s director of business development Fikri Rawi says while there is currently a shortage of takaful operators worldwide, the potential in the takaful market globally is huge.

“According to research, the demand for takaful products worldwide is expected to increase to US$10.1 billion (about RM33 billion) by 2011. Of it, about US$2 billion will be written in the Gulf countries while US$3.2 billion will be in Asia-Pacific. Another US$2.6 billion is expected to come from Turkey, China, India and the US,” says Fikri.

The ICBU allows Malaysian takaful operators to carry out takaful business with non-residents in currencies other than the ringgit. The income arising from ICBU is eligible for tax exemption for 10 years effective from the year of assessment 2007. Of the nine takaful licensed operators in Malaysia, five have obtained the ICBU licence. They are CIMB-Aviva, Syarikat Takaful, Etiqa (Maybank), Hong Leong Takaful and BSN Prudential.

Eyes on Indonesia

Now that CIMB-Aviva has the licence, which markets is it looking to expand its takaful business?
“We have to choose the markets… the Middle Eastern markets will be the obvious places to go to next. But it’s a matter of securing distribution and actually getting people to work with you,” says Machell.

“It is an interesting thing to look at. However, it’s a lower priority at the moment compared to building the business in Malaysia as there is more value to grow locally in the short term,” he adds.

Besides the Middle East in which both Aviva and CIMB have a presence, the former has also set its sights on Indonesia, another country with a large Muslim population. Here, the added advantage is that CIMB has a significant presence.

“Building scale in our businesses and distribution that we have already is our priority… we want to set our store in those economies as they grow in the future. We are looking at a number of markets now, including Indonesia. We just went into South Korea. There are other markets like Vietnam and Thailand… we are looking at them, too. If we can find the right partners in those markets, we will go there,” says Machell.

Nevertheless, when asked whether Aviva would use CIMB as a partner to enter into Indonesia as it has a bank there, he declined to comment.

However, he says should Aviva venture into new markets, it will be through bancassurance. “We believe have a competitive advantage in bancassurance. We took the model in Europe to Asia and we believe we have implemented it really well. If you look at the deals we have done in Malaysia, Singapore and South Korea… it was on the back of a partnership with one of the big local banks there. We believe we can build good partners with whom we can grow our business. We will continue to use this approach to get into new markets,” says Machell. Aviva has 90 partnerships with banks and several more with non-banking institutions.

On its business in Malaysia, he says since Aviva joined forces with CIMB, the market conditions have changed and as a result, they are likely to introduce more products tailored to current conditions.
“We’ve introduced a couple of new products and we expect to unveil more in the next year or so. The market conditions have changed a bit somewhat from where we started. There’s a bit more uncertainty now economically. When we started mid-year, it was before the credit crunch and people were more keen on buying investment type of products. But now they are less interested in these products; they are looking more at the guaranteed type of products… people’s appetite for risk is reduced so the challenge we have now is to tailor our offerings to suit current market conditions,” says Machell.

Nevertheless, the hunger for takaful products is obvious. According to Fikri, there are opportunities worldwide for such products based on a research done by CIMB-Aviva. “Globally, takaful is relatively in its infancy stage compared to conventional insurance. If anything, CIMB-Aviva will leverage our shareholders’ presence worldwide… there is a desire to start early… maybe from next year onwards,” says Fikri.

Aviva is operating in 27 countries while CIMB is in 11 countries. Having paid a premium, Aviva is certainly not wasting anytime on capitalising on the strength of its partner to expand its presence in the region, especially in the Muslim markets.

Irrespective of whether Aviva will join forces with CIMB in Indonesia again, it looks like their partnership in Malaysia is heading for bigger things.