Dynamic financial model of life insurance and family takaful companies in Malaysia

Abstract

The ability to understand and identify factors affecting solvency of life insurance and family takaful company is crucial to various stakeholders of an insurance industry. The purpose of this study is to empirically study firm-specific and economic factors affecting solvency of life conventional insurance and family takaful companies in an emerging economy and well-regulated financial industry of Malaysia. Equity-to-asset and equity-to-technical reserve ratio are used as proxy for solvency. The investigation was done from year 2008 to 2012 on 11 life insurance and six family takaful companies using balanced panel data regression model. The study found that expenses and investment income are statistically significant and positively related to solvency of life insurance business. Meanwhile, company size and liquidity are statistically significant and negatively related to solvency of life insurers' solvency. For family takaful, takaful leverage and contribution growth have significant positive effect, while, expenses and company size have significant negative effect on solvency.

Solvency determinants: evidence from the Takaful insurance industry

“…Although both studies cover the Malaysian market, they cover different time periods-the first (2003 to 2007) a period of relative stability in the global capital markets, the second (2008 to 2012) including the 2008 financial crisis and the subsequent tentative recovery. While the results of Yakob et al (2012) are essentially in line with theory, some of the results of Abduh and Isma (2016) are difficult to reconcile with theoretical expectations. For example, against theoretical expectations, expenses is positively related to solvency for conventional life insurance firms, and leverage is positively related to solvency for Takaful firms.…”

“…The samples comprised 11 conventional life insurance and six family Takaful firms in Malaysia for the time period 2008 to 2012. Abduh and Isma (2016) conclude that for conventional life insurance firms, expenses and investment income are positively related to solvency, while company size and liquidity are significantly negatively related. For family Takaful, leverage and contribution growth are significantly positive, while expenses and company size are significantly negative.…”

“…We find two empirical studies about the determinants of solvency of Takaful firms, namely Yakob et al (2012) and Abduh and Isma (2016). Yakob et al (2012) conduct a random effects regression on a sample of 14 conventional and five Takaful firms in Malaysia, covering the time period 2003 to 2007.…”

“…Other explanatory variables are not found to be statistically significant, including both firm-specific and macroeconomic factors, such as gross written premiums, claims, management expenses, reinsurance, total debt, company size, interest rates and gross domestic product (GDP). Abduh and Isma (2016) use the equity/ assets ratio as well as equity/technical reserves as independent variables as proxies for solvency. The samples comprised 11 conventional life insurance and six family Takaful firms in Malaysia for the time period 2008 to 2012.…”

“…Recently, serious concerns have arisen about the solvency of the Takaful industry, which has become less stable compared to the conventional insurance industry. In particular, many Takaful firms have collapsed due to several reasons, including high wakalah fees (AM Best Information Services 2021), inefficiency (Yakob et al 2012;Abduh and Isma 2016), poor investment income (Tolefat and Asutay 2013), deficits in the participants' fund (Alokla and Daynes 2017) and fragmented regulation (Alshammari et al 2018;AM Best Information Services 2016b).…”