A comparative study of Takaful and conventional insurance: empirical evidence from the Malaysian market

Hussein A. Abdou · Khurshid Ali · Roger J. Lister

26 citations0/0 files storedCLOK (University of Central Lancashire)

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Islamic Finance and Banking Studies Financial Analysis and Corporate Governance Insurance and Financial Risk Management

Abstract

The purpose of this paper is to distinguish between the performance levels of the Malaysian Takaful and conventional life insurance industries with a view to better informing the decisions of stakeholders. Our analysis makes use of financial ratios and macro-economic variables namely Gross Domestic Product (GDP), Consumer Price Index (CPI) and Treasury Bill Rate (TBR). We use two stage analysis. In the first stage we use discriminant analysis and logistic regression models for the financial ratios as independent variables and a dichotomous dependent variable. In the second stage we use multiple regression to investigate the macro-economic independent variables with net premiums/contributions and net investment income as dependent variables. The data is extracted from companies’ annual reports. Our results indicate that conventional insurers perform better than Takaful companies in terms of profitability and risk measurement but Takaful outperform conventional insurance in respect of premium to surplus ratio. However, Takaful companies have prudent underwriting practices in place to curb information asymmetry. Furthermore, our results indicate that, unlike in the case of conventional insurance, the macro-economic variables have no impact on the growth of Takaful companies as measured by the net premiums/ contributions. However, net investment income shows statistical significance for both industries. This is indicative of the fact that both industries efficiently utilize their funds to generate the desired return on their investments. Our paper has scholarly implications in terms of the empirical analysis of conventional and Islamic financial institutions – insurance in particular. It can also inform market decisions and public policy with respect to the economic contribution of the insurance industry in Malaysia.

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References

2003Economic, Demographic, and Institutional Determinants of Life Insurance Consumption across Countries 2004The Determinants of Financial Health of Asian Insurance Companies 2004PERFORMANCE OF INTEREST-FREE ISLAMIC BANKS VIS-À-VIS INTEREST-BASED CONVENTIONAL BANKS OF BAHRAIN 2001ISLAMIC AND CONVENTIONAL BANKING IN THE NINETIES: A COMPARATIVE STUDY *2010Goal orientation and organizational commitment 2012CONCEPTUAL AND OPERATIONAL DIFFERENCES BETWEEN GENERAL TAKAFUL AND CONVENTIONAL INSURANCE 2011Corporate failure prediction: a study of public listed companies in Malaysia 2012A Study on Takaful and Conventional Insurance Preferences: The Case of Brunei

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