Efficiency, firm-specific and corporate governance factors of the Takaful insurance

Abstract

Purpose Malaysia is recognised as an emerging country with a large Muslim population, making the Malaysian Takaful industry the largest Takaful market in the Southeast Asia region and, notably, one of the fastest growing markets globally. Malaysia is also the first country globally to implement a risk-based capital framework for Takaful. Therefore, the purpose of this paper is to identify the factors that influence the efficiency level (cost efficiency and technical efficiency) of the Takaful industry and to examine the effects of Takaful insurance firms’ specific factors and corporate governance factors that influence the efficiency of Takaful insurance in Malaysia. Design/methodology/approach In this paper, the efficiency level of the Malaysian Takaful industry was examined between 2011 and 2015. The sample consisted of 11 family Takaful and 8 general Takaful operators. Two-stage Data Envelopment Analysis (DEA) was used by first, conducting non-parametric frontier data envelopment analysis to obtain a DEA score for each operator. This was followed by panel regression with the DEA scores as the dependent variable and the insurance firms’ specific factors and corporate governance factors as the independent variables. Findings The results of DEA indicate that Takaful operators in general have allocative inefficiency but family Takaful is more cost efficient than general Takaful. Results of panel data analysis reveal that corporate governance factors do influence the cost efficiency but find no evidence on the firm-specific factors towards the cost efficiency and technical efficiency on Takaful operators. Board size and the proportion of non-executive directors impose a negative and significant relationship with cost efficiency, while proportion of Muslim directors in the board is not significant. Research limitations/implications This paper focused solely on Malaysia which uses strict regulations governing the Takaful insurance market. Due diligence was also performed to minimise any limitation in the paper. It is proposed that future studies should examine this issue in greater detail by incorporating more data from other Muslim countries. Practical implications The findings of this paper have significant implications for policymakers to understand the efficiency condition in the Takaful market. Takaful operators should maintain a small board size with a higher proportion of executive directors, given they could improve the level of effective decision-making to enhance the cost efficiency. As corporate governance factors are significant, Takaful operators in Malaysia should also undertake transparent disclosure practice and reporting such as providing adequate and relevant information related to Shariah compliance and principles to provide a robust foundation as the Takaful market leader regarding Takaful regulations globally. Social implications The consumer is able to make a better decision when choosing Takaful insurance company to protect their interests. Originality/value No similar paper has been undertaken to the best of the researcher’s knowledge using similar research design and scope to investigate the efficiency of Takaful insurance as in this paper. Takaful insurance is a rapidly growing industry in Malaysia, setting a prime example to other countries globally. Malaysia was selected for this study, as it is the only nation that has implemented the most extreme regulation in the Takaful insurance market.

Governance and Performance in Insurance Companies: A Bibliometric Analysis and A Meta-Analysis

“…Studies on governance dedicated to insurance companies are less common than cross-sector studies or studies focusing on the banking and finance sector (taken as a whole). The fewer studies on insurance companies are published in specialist journals and when conducted in non-Anglo-Saxon countries, they are characterized by smaller survey samples (Fekadu, 2015;Garba & Abubakar, 2014;Gugong, Arugu, & Dandago, 2014;Hidayat & Firmansyah, 2017;Ibe, Okanya, & Ogochukwu, 2017;Jeng & Lai, 2005;Kader, Adams, & Hardwick, 2010;Lee, Cheng, Har, Md Nassir, & Ab Razak, 2019;Li, Zhang, Tsai, & Qiu, 2017;Najjar & Salman, 2013;Sandada, Man-zanga, & Shamhuyenhanzva, 2015;Wang, Jeng, & Peng, 2007). Studies in developed countries concern almost exclusively the United States, the United Kingdom (Hardwick & Letza, 1999O'Sullivan & Diacon, 1999 and only a few other European countries (Deev & Khazalia, 2017;Eling & Marek, 2014;Genetay, 1999;Lambalk & de Graaf, 2017;Pavi Kramari, Aleksic, & Pejic-Bach, 2018;Pullano, 2011;Venuti & Alfiero, 2016).…”

“…Studies in developed countries concern almost exclusively the United States, the United Kingdom (Hardwick & Letza, 1999O'Sullivan & Diacon, 1999 and only a few other European countries (Deev & Khazalia, 2017;Eling & Marek, 2014;Genetay, 1999;Lambalk & de Graaf, 2017;Pavi Kramari, Aleksic, & Pejic-Bach, 2018;Pullano, 2011;Venuti & Alfiero, 2016). More recently, the research has been extended to companies following Islamic precepts (Fekadu, 2015;Kader et al, 2010;Kader, Adams, Hardwick, & Kwon, 2014;Karbhari, Muye, Hassan, & Elnahass, 2018;Lee et al, 2019;Markonah, Sudiro, & Rahayu, 2019;Najjar & Salman, 2013;Ng, Chong, & Ismail, 2012) However, a focus on insurance research on governance contributes to enriching the results of the wider research strand with thanks to the specific features of the insurance companies.…”

Ownership type, business model, market structure, and the performance of Takaful and conventional insurance companies in Malaysia

“…The resilience of industry in the market even during economic turmoil has motivated researchers to investigate the institutions' various aspects and characteristics under its umbrella and compare them with the counterpart, the conventional industry. The Takaful industry (Islamic insurance) has been under investigation recently due to the concerns raised over the conventional insurance functioning (Rubio-Misas, 2020; Kantakji et al, 2020;Lee et al, 2019Lee et al, , 2018. 1 For the case of Malaysia, Takaful and the insurance industry have recorded positive growth in recent years.…”

“…In this regard, our study is distinctive from prior research in several ways. First, the previous investigation of the Takaful business in Malaysia has explored non-life Takaful firms with several Takaful operators sampled was four to six companies (see, e.g., Ismail, 2013;Ismail et al, 2011) or Takaful operators without comparing with conventional insurance (see, e.g., Lee et al, 2019Lee et al, , 2018. However, this study examines the determinants of performance for the conventional insurance and Takaful in both types of business, namely life and non-life operations for a sample of 11 Takaful companies and 33 conventional insurance firms operated in Malaysia of 2016.…”

“…Third, this study adds to the literature by ascertaining whether ownership types categorised into the local and foreign matter for firms' performance. Lee et al (2019) examined the impact of foreign participation on Takaful firms' performance. However, this paper extends Lee et al (2019) by comparing the impact of ownership on conventional and Takaful firms.…”