Abstract
Risk-based capital is used to specify minimum capital requirements for insurers, but it can also cause insurers to bear higher risk if the actual risk of an asset is improperly assessed. This study investigates the efficiency, productivity and competitiveness of the Malaysian insurance industry. The usefulness of regulatory policies will be studied, with particular focus on the risk-based capital framework. This study includes all insurance firms operating in Malaysia between 2000 and 2017. Data envelopment analysis, Malmquist productivity index and Panzar–Rosse methodologies are employed. The findings indicate that life insurers are more efficient and competitive than general insurers. There is a deterioration in the efficiency and productivity of conventional insurers following implementation of risk-based capital requirements. The risk-based capital for Takaful framework, however, improves Takaful insurers’ efficiency and productivity. The findings have implications for business strategy development, such as the level of restrictions on insurance operations. General insurers are recommended to employ technology-enhancing pricing and claims systems to increase efficiency.
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Notes
Takaful is an insurance system which is subject to Islamic law and free from riba (interest), gharar (uncertainty) and maysir (gambling) (Comparehero 2019). Takaful insurance is a profit-sharing contract between participants and Takaful operators. The risk is not transferred but shared among the participants who form a common pool.
However, some of the terms used for these variables vary for different operators. For conventional general insurers, they are: (i) total investments, (ii) net claims paid, and (iii) net premiums; for conventional life insurers, they are: (i) total investments, (ii) net benefits and (iii) net premiums; for Takaful general insurers, they are: (i) total investments, (ii) net claims paid and (iii) net contributions; for Takaful life insurers, they are: (i) total investments, (ii) net benefits and (iii) net contributions.
Insurtech is the combination of insurance and technology. Insurtech is an innovation that transforms the insurance sector to meet rapidly-changing modern insurance demands with cheaper costs, greater efficiency and better targeting via customisation (Yurkevich 2018).
Artificial intelligence (AI) utilises the power of robotics to identify behavioural patterns and provide predictive analysis, risk assessment, pricing assessment and manual task automation (Yurkevich 2018).
Blockchain is a decentralised digital ledger that provides enhanced security, trust and speed around transactions. It benefits the insurance sector in terms of fraud management and cost reduction for claims processing (Yurkevich 2018).
Sharia law (Islamic law) is a religious law derived from an Islamic perspective, especially the Quran (religious text of Islam). Sharia law lists rules and principles on marriage, finance, prayer and fasting.
For brevity, the table of conventional and Takaful insurers’ productivity scores is not reported, but it is available upon request.
For brevity, the table showing the Pearson’s correlation matrix is not reported, but it is available upon request.
For brevity, the table showing the results of the long-run equilibrium test for the Malaysian insurance industry is not reported, but it is available upon request.
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Acknowledgements
This work was supported by the Malaysian Ministry of Higher Education under the Fundamental Research Grant Scheme [FRGS/1/2017/SS01/UTAR/03/1] and the Universiti Tunku Abdul Rahman [RSS/PRA Tuition Fee Sponsorship from UTAR Education Foundation].
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Lim, QM., Lee, HS. & Har, WM. Efficiency, productivity and competitiveness of the Malaysian insurance sector: an analysis of risk-based capital regulation. Geneva Pap Risk Insur Issues Pract 46, 146–172 (2021). https://doi.org/10.1057/s41288-020-00173-8
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DOI: https://doi.org/10.1057/s41288-020-00173-8