The Malaysian Fund Managers Perspective on the Viability of Takaful Operators Investment

Takaful operators are expected by the policyholders to act beyond the role of traditional insurance companies that only offer Shariah-compliant protection services. They are expected to be commercially viable. One of the ways to be commercially viable is takaful operators must be able to invest the policyholders' funds in the profitable investment avenues. Nevertheless, the critical issue before investing the funds is to develop products that are suitable with the takaful operators' investment strategy. This study employed a questionnaire survey to gather the feedback of fund managers from 11 takaful operators in Malaysia — all were the senior staffs of takaful operators in Malaysia were surveyed. The questionnaire is developed in the form of a Likert scale ranging from 1 to 5 as the research instrument. By Delphi technique, the draft of the questionnaire was sent to a panel of experts for review, was adopted, and their feedback reflected in the final questionnaire. The experts were a shariah advisor, a corporate finance manager, and a senior executive at the central bank. Findings indicate that policyholders' expectations on their investments are met and the products so far compatible with takaful operators' investment strategies.


INTRODUCTION
Until 2018, there are three types of takaful have been licenced to operate in Malaysia: family takaful; general takaful; and composite takaful (both combined). 1 Importantly, licences for these takaful operators, issued by the central bank, differ depending on the nature of the takaful business. Islamic Financial Services Act 2013 (IFSA), (2013) mandated significant changes to takaful operations, as it requires a dedicated takaful operator for each type of takaful business. Beginning of 2018 sees the end of the five-year transition period provided under IFSA 2013 for composite takaful companies to implement the requirement to separate their family and general takaful businesses into two separate entities. To date (as of March 2018), only one composite takaful operator, Etiqa Takaful Berhad, has officially segregated the entity into general takaful and family takaful businesses. This operator is also evidenced in the appointment of separate chief executive officers for each of the two businesses -Etiqa General Takaful and Etiqa Family Takaful. The remaining composite takaful operators are expected to follow soon, since 1 st July 2018 is the cut-off date for completion of the business segregation process.
A consequence of IFSA, (2013) is the expected change in the number of Malaysia's takaful operators to be more than the 11 companies that existed as of the time of its announcement. 2 Potential changes may result from mergers between general takaful businesses, shifts in ownership due to the changing of stakes in these general takaful businesses, or the winding up of companies after transferring the remaining cases or policies to other takaful operators (Singh, 2013). Nevertheless, evidence from the split of Etiqa Takaful Berhad into Etiqa Family Takaful and Etiqa General Takaful, suggests that operational changes may be minimal, at least in the short term. This split reflects that most business functions are still shared, as in the previous entity. These include areas such as customer service, human resources, and the agency platform. Although the transition is still ongoing, the only noticeable operational change has been the appointment as mentioned earlier of separate CEOs for each of the two takaful businesses.
The introduction of Risk-Based Capital for Takaful operators (RBCT) is also expected to shape trends in terms of the number of operators. Under the Takaful Act 1984, the central bank had previously specified a minimum capital of MYR 100 million for takaful operators. However, under IFSA 2013 minimum capital requirements are subject to the central bank's discretion, there being no specification on such a threshold as per the previous Act (Kassim & Ismail, 2014). This suggests takaful operators might be established with smaller capital requirements, enabling new industry entrants to be driven more by the nature and complexity of the type of takaful business chosen (Htay et al., 2015).
As well as changing the competitive environment, an important consequence of IFSA, (2013) implementation is its potential impact on investment strategy (and profitability)the focus of this paper. Takaful operators' investment strategies (and profits) are closely related to the products offered, each of which embeds specific investment objectives (Mohamad et al., 2019). Both the takaful products made available, and fund participants' demand for these products will influence takaful operators' investment practices (Ali et al., 2019). This article highlights the importance of takaful products to investment practice and presents findings derived from feedback to a questionnaire provided to each of Malaysia's 11 takaful operators' fund managers. This research focus is regarding the availability of takaful products to meet their investment needs. The findings, therefore, reflect the industry's perspective on this issue.
The rest of the paper is presented as follows. Section 2 discusses the types of takaful product available and the features of each. Section 3 provides a brief outline of the research method. Section 4 presents the findings from the questionnaire. Section 5 finishes the paper, providing conclusions and suggestions for future research.

Takaful Products
The takaful industry in Malaysia is regarded as 'takaful-tijari' or 'commercially driven', asseen in the structure and business model of every takaful operator in Malaysia (Bank Negara Malaysia, 2004).
This model is either in the form of a modified wakalah or hybrid wakalah (Olorogun, 2015). Takaful operators in Malaysia commonly derive their earnings from wakalah (agency) fees, the surplus from the participant special account (PSA), and fees or profit-sharing from the investment of the participant account (PA) (Alkhan & Hassan, 2020). The earnings trend for takaful operators evidence that investment profit has gradually become the most important source of income, slowly surpassing the wakalah fee (Kantakji et al., 2020). This is a good sign for the companies as well as fund participants because it demonstrates that takaful operators are actively seeking investments and portfolios to maintain and improve the investment returns that support the products their businesses offer (Muhamat et al., 2019). Moreover, the type of takaful model adopted, such as waqf model or others (Zakaria et al., 2019); might influence the investment management of the firms.
In general, takaful products can be placed into three categories: General takaful (Islamic general insurance) offers protection or coverage against risks of a general nature for companies or individuals (takaful contributors). General takaful products include motor insurance, fire and allied perils, workers' compensation, marine cargo, engineering insurance, property and transport (Echchabi & Ayedh, 2015;Hassan et al., 2018). Investment returns are used to smooth the takaful premium (contribution) cost since general takaful is mostly comprised of short-term contractual policies. As such, a positive investment return will help to keep the premium cost lower.
Family takaful (Islamic life insurance) provides coverage for participation by individuals or corporate bodies on a long-term basis with maturity periods that generally range from 10 to 40 years. Family takaful products include medical and health plans, education, accident, marriage, hajj and umra plans, lump-sum investments, savings plans, retirement plans, and mortgages (Salleh &Laksana, 2018;Remli & Rosman, 2018). Investment returns are the source of wealth accumulation since family takaful involves long-term contractual policies. Takaful contributors expect to build up wealth (saving) as well as receiving protection. 3 Retakaful coverage (Islamic reinsurance) offers coverage for takaful companies against risks, including loss or dilution of capital and reserves resulting from high claim exposures.
From takaful contributors' perspectives, utilising general and family takaful products is of interest, retakaful being intended only for takaful operators. Furthermore, the above-listed takaful products can be broadly classified as savings or risk-coverage products (Odierno, 2012). In practice, many takaful operators'products combine both savings and coverage features, although the feature that dominates varies according to each product's primary objective.
For instance, an investment-linked policy (ILP) is usually bundled with protection. However, a large portion of the premium (contribution) is channelled to investment, and only a minor part is pooled into the risk fund. The endowment policy has a contractual period for a specified number of years, whereby compensation will be given when death occurs, or when the policy reaches maturity. This policy acts as a saving instrument and at the same time, protects the takaful contributors (Lewis & Wallace, 1997). An example is an endowment policy for education with life coverage.
Temporary policy refers to a policy with a specified number of years to maturation, with a constant annual premium (contribution) being determined. At the end of the contractual period, takaful contributors will have the option to renew the policy. An example of a temporary policy is a mortgage or MRTT (mortgage reducing term takaful), where the takaful operator will help to settle the house financing of takaful contributors in the case of death and permanent disability. In Malaysia, this plan tends to involve a single paid premium (contribution) which means that the takaful operator will hold prepaid premium monies on behalf of the contributors for as long as 15 to 20 years . As such, proper investment of the fund is needed (Odierno, 2012).
Another takaful plan is the medical and health policy. This plan will assist with contributors' medical needs in the form of financial assistance for surgery and hospitalisation, which normally requires a substantial amount of money (Wahab & Tajuddin, 2020). In terms of duration, Odierno (2012) states that this policy can be as long as a MRTT. Nevertheless, in terms of premiums paid, the medical and health takaful plan is based on regular contributions compared to MRTT, which is normally in a lump-sum payment. The early paid premiums in this plan will be used to offset future risk related to the age-risk factor by building-up the fund through investment. This plan can also be sold in rider form attached to a unit-linked or traditional savings plan (Parveen et al., 2019).
A takaful annuity is a kind of policy intended to assist the takaful contributor upon retirement until death by supplying a fixed amount of income every year. Annuities were sold for a short period in the early 2000s in Malaysia (Odierno,2012) before the demand for the product was affected by the withdrawal of the Employees Provident Fund of Malaysia (EPF) from the annuity scheme. The plan was structured in two portions, an accumulation period and a payout period. Both periods were generally of long duration. Odierno (2012) signifies that the plan does not guarantee a return, but because of promotion, it is viewed as implicitly guaranteed and treated as such by the regulators.
The investment-linked policy (ILP) function as a savings instrument and at the same time provides minimum compensation to takaful contributors in case of death. The saving or investment portion in the Participant Account (PA) is unitised into units linked to investment portfolios similar to unit trust investments (Adawiah et al., 2008). A large portion of the premiums paid (some allocation is also made for an administration fee and protection benefits) will be used to buy investment-linked units, such as a unit trust or other form of investment determined by the takaful operator.
The ILP adopts a 'drip' basis, 4 Whereby some amount of funds is gradually transferred from the Participant Account (savings fund) to a Participant Special Account (risk fund) (Odierno, 2012). The premium (contribution) is paid regularly. If there is no claim from the policyholder in that particular year, the person is entitled to receive a return, which will be used to buy additional investment-linked units (Noor, 2009). The contributors' funds are directly linked to the value of the assets in which the funds are invested. The proceeds depend upon the growth in interim performance of the underlying fund or investment pool, with the remaining units being sold at maturity, or in the case of the death of the takaful contributors (Lewis, 2005).

General Takaful Products
General takaful products are viewed as short-term plans, excepting some longtailed policies. Even so, general takaful's long-tailed policies are periodically shorter than family takaful products (Odierno, 2012). Longtails on policies result from long settlement times in the case of legal procedures caused by lawsuits involving clients in third-party motor, workman's compensation, and third-party liability cases. The contribution (premium) for general takaful usually is based on yearly contributions and is renewable at the end of the period.

Takaful Product's Influence on Investment
The distinguishing feature of takaful operators who embrace the stock form of takaful model (Naim et al., 2020), is that the takaful contributors bear investment costs to each product; either investment-linked products or others (e.g. endowment, mortgage, medical and health). Investment costs are charged through an investment fee paid to takaful operators, or via a nominated cost against contributions paid by takaful contributors and separated between the participant special account (PSA) and the participant account (PA). For every takaful product, the premium (contribution) paid will be segregated into a dedicated investment account, which will be invested in a variety of investment instruments (Soualhi & Al Shammari, 2015).
It is also important to note that for investment-linked products, the central bank has specified a ceiling price as a guideline for takaful operators when developing and selling their investment-linked products. However, for other products, the investment fee is at the discretion of the takaful operator (Bank Negara Malaysia, 2013).
That the forms of insurance product offered by a firm have a significant influence on its required investment strategy is clear (Shahid, 2020). For example, where investment guarantees are offered as part of a product, policyholders cover the costs of providing these guarantees, with the insurer investing funds raised from these charges on risk managementhedging, or additional equity capital, or reinsurance (e.g., see Huber et al., 2015). Additionally, product innovation (e.g., the addition of an investment or savings vehicle to a life insurance product) will require modification of the businesses' investment strategy (Carino et al., 1994). Thus, the set of takaful products it offers will influence the takaful operator's investment needs (Tolefat, 2009), reflecting the cash flow profiles that it must manage (Kantakji et al., 2020).
For family takaful, the endowment policy requires the operator to manage an accumulated balance of takaful contributors' savings (Alotaibi & Hariri, 2020). For annuities, insurers (takaful operators) have to manage a de-cumulating balance of the contributors' savings (Lewis & Wallace, 1997). For the investmentlinked policy, takaful operators have to be prudent in managing a stream of income (premium) that will be used to buy additional investment units (Alshammari et al., 2018).
These products carry with them inherent risks or forecast liabilities that are long-term. Thus, each is likely to require the need to make use of longer-dated investments and must offset risks with investment instruments that provide stable returns and less volatility.
In contrast, in general takaful, most risks are short-term. Additionally, the short-tailed nature of most general takaful products suggests lower requirements for both income and term from takaful investment. As such, the appropriate investment instruments would be those that earn a modest income and at the same time possess liquidity. Nevertheless, as mentioned earlier, some 'long-tailed' policies (e.g., workers' compensation claims), having medium-term risks, may require a suitable investment strategy in order to meet future requirements of the policy, such as those deriving from litigation procedures. For example, in Saudi Arabia, the general takaful business is more significant than family takaful, which differs from the situation in Malaysia and Indonesia (Ismail et al., 2017).
However, despite the lower investment profit required by general as compared to family takaful, positive investment performance is still needed to lower the future premium (contribution) costs for takaful contributors. This positive performance is essential in order to keep current takaful contributors with the takaful operator, and also as a marketing feature to attract new customers.

Takaful Operators' Investment Profits
Takaful operators have earned significant income from their companies' investment activities over the years. Investment profit (at the gross income level) displays a definite upward trend for all takaful operators, including the industry "newbies", even if they are yet to record any net profit since inception. Year 2012 Year 2013 Year 2014 Year 2015 Year 2016 Year 2012 Year 2013 Year 2014 Year 2015 Year 2016

RESEARCH METHODS
This study employed a questionnaire with a Likert scale ranging from 1 to 5 as the research instrument. The Delphi technique, in which the draft of the questionnaire was sent to a panel of experts for review, was adopted and their feedback reflected in the final questionnaire. The experts were a shariah advisor, a corporate finance manager, and a senior executive at the central bank. Questionnaires were distributed to the fund managers of the 11 takaful operators in Malaysiameaning that senior staffs in all takaful operators in Malaysia were surveyed. Five statements were developed to explore takaful products (TP) in the context of takaful operators' investment practices. These statements were designed to investigate the influence of takaful products from several perspectives: takaful operators' investment strategies; the availability of financial market instruments to support the strategies; the targeted market segment; and the expectation of investment-linked takaful products being prioritised by takaful operators (only in the family takaful business).
The statements are as follows: 1) Our firm's investment style is influenced by the products offered by the takaful operator. 2) The takaful operator lacks products to serve its investment objectives.
3) There are sufficient capital market instruments to match the investment objectives related to takaful products. 4) At present, takaful products are directed to selected market segments. 5) The company always meets takaful contributors' expectations on investment returns as promoted by the investment-linked takaful products.
Responses were recorded on the Likert scale between 1 (strongly disagree) and 5 (strongly agree), with a score of 3 indicating the participant was undecided on the statement.The respondents' feedback was then analysed using descriptive

RESULTS AND DISCUSSION
In the following, a descriptive presentation and a brief discussion of the survey findings are followed by the presentation and discussion of the results of nonparametric tests.

Descriptive analysis Questionnaire statement: The products offered by the takaful operator influences our firm's investment style.
91.3% or 21 respondents in family takaful agreed with the statement while only 8.7% or two respondents disagreed (Table 3). The same pattern was shown in general takaful, with 94.1% or 16 respondents agreeing with the statement while 5.9%, equivalent to one respondent, disagreed. The near-consensus results correspond with those of Tolefat& Asutay (2013) and In Lewis & Wallace (1997) study about the influence of takaful and insurance products on the institution's investment style, the investment strategies of takaful operators are closely related to the type of products offered by the takaful operators, which requires 'a mix and match approach' in terms of assets and liabilities (Khan, 2007). In the context of family takaful, the emphasis is placed more on long-and medium-term investment objectives, while for general takaful operators, their consideration is more on short-term investment requirements.  A similar level of concordance to that in Table 3 is displayed in Table 4 for both kinds of takaful business. However, in this case, most respondents disagreed with the statement. Variation in the responses indicates that, for some fund managers, achieving the investment objectives prescribed by their companies is challenging. Despite the small difference, 39.1% respondents in family takaful and 41.2% respondents in general takaful felt that their companies lacked the set of takaful products to best suit their investment objectives.

Questionnaire statement: The takaful operator lacks products to serve its investment objectives.
More than half of the respondents in each business: 56.5% or 13 respondents in family takaful and 53% or nine respondents in general takaful rejected the questionnaire statement. This implies that a small majority of them felt that takaful operators have sufficient products in the market to suit their investment objectives. In both businesses, only one respondent felt neutral towards the statement.
As mentioned earlier, this statement complements the earlier ones. Responses to the statement are summarised in Table 3 and identify the potential influence of takaful products on the firms' investment style. Table 4 surveys opinions as to whether the takaful products are sufficient to support the firms' investment objectives. The top-down approach (as verified by one of the takaful operator's CIOs) of developing the investment objectives before designing the takaful products signifies that takaful operators should have sufficient products to cater to their investment needs and clients' demands because each investment objective is tagged with a range of products. This concurs with the findings of (Khan, 2007).
Nevertheless, a requirement to continuously be innovative is deemed necessary since products are currently too focused on selected market segments. This suggests that there are untapped business opportunities to be explored. For example, green takaful products are yet to be explored by takaful operators globally.

Questionnaire statement: There are sufficient capital market instruments to match the investment objectives related to takaful products.
The results for this statement indicate mixed of respondents' opinions in both businesses; yet, the pattern is similar, as shown in Table 5. For family takaful, 47.8% or 11 respondents supported the statement while 34.8% or eight respondents opposed it, and four respondents or 17.4% remained neutral. General takaful operators were more evenly split in their opinions since 41.2% or seven respondents supported and rejected the statement, while 17.6% or three respondents remained neutral. The availability of capital market instruments to accommodate the demands of financial institutions, including takaful operators, is imperative due to the scarcity of such instruments for the niche Islamic finance sector. Nevertheless, Malaysia has a comprehensive Islamic financial system, supported by four main components: an Islamic banking sector, the takaful sector, an Islamic money market, and an Islamic capital market. These four components complement each other in such a way that the financial products of each sector are utilised to meet the financial needs of the institutions.
For instance, a takaful operator may manage its long-and medium-term investment horizons by investing in Sukuk or Islamic bonds, and sometimes on properties in the form of either physical real estate or Islamic real estate investment trusts, i-REITs (Khan, 2007;Tolefat & Asutay, 2013). On the other hand, for short-term investment requirements, funds will be heavily invested in the Islamic money market via funds deposited in the Islamic banks in the form of special investment accounts (Khan, 2007).
The Islamic financial instruments in Malaysia may be considered as adequate. However, competition from other Islamic financial institutions, combined with the demands from conventional financial institutions for the same instruments, may cause some disruptions to the takaful operator when it comes to the 'mix and match' process for the investment portfolio. Accordingly, some may perceive the capital market instruments as inadequate to cater for the takaful operators' needs.
Questionnaire statement: At present, takaful products are directed to selected market segments. Table 6 depicts that in family takaful, a majority of the respondents concurred with the statement, 60.9% or 13 respondents, whereas 30.4% or seven respondents objected to it. Also, two respondents (8.7%) remained undecided. In generaltakaful, a similar trend is evident as a majority of the respondents supported the statement, 64.7% or 11 respondents, while 29.4% rejected it, and one respondent (5.9%) chose to be neutral. A majority of the respondents in both business areas were of the view that, to some extent, takaful operators are selective in selling their takaful products.This is due to the higher income being generated from such products in the form of wakalah(agency) fees.In family takaful, product concentration can be seen in personal takaful coverage, whereas in general takaful it would be on vehicle takaful coverage. For family takaful, this situation is not a deliberate plan of the takaful operators. Instead, it may be caused by the heavy use of agents in family takaful businesses. The agents would be remunerated in the form of commissions from takaful operators for every successful case.
On the other hand, road traffic regulations require automobile owners to buy car insurance, at least third-party coverage. This has successfully contributed to the high numbers of policies or takaful certificates sold for automobile takaful policya general takaful product.

Questionnaire statement: The company always meets takaful contributors' expectations on investment returns as promoted by the investment-linked takaful products.
The statement for Table 7 is only valid for family takaful businesses, as it deals with the investment-linked products offered by every family takaful operator in Malaysia. A majority of the respondents, 78.3% or 18 respondents, supported the statement while 21.7% or five respondents remained neutral, and none rejected it. As discussed in Section 2, investment-linked takaful products are the most significant income source for the takaful operators. These serve as protection and savings vehicles at the same time. As a result, it is essential to determine the

Non-parametric test (Mann-Whitney U Test)
The Mann-Whitney (MW) test is used to establish the difference between two independent samples. It bears a resemblance to the t-test in the parametric analysis. Takaful funds are characterised by their business objective: either family or general takaful. Therefore, these types of funds were tested with other items in the questionnaire in order to determine if there are significant differences between the sector's two types of takaful funds.
The results indicate that both groups of respondents (funds managers of family and general takaful) gave similar and comparable answers to each question. This signifies that investment practices in general takaful and family takaful are similar. This can be traced to the companies' structures, as presented earlier; some takaful operators are composite takaful operators, which mean that they manage both products. This situation might be different in the future when composite takaful operators have separated into two separate business entities.
Fund managers' feedback to the questionnaire that forms the basis for this study signifies that the set of takaful products offered is suited to be matched by their companies' investment strategies, as well as fulfilling expectations of policyholders.

CONCLUSION
In a nutshell, this study informs that the takaful products' return requirements will influence the investment strategy for takaful operators' investment funds. Therefore, takaful operators need to develop new products that can meet the customers' demands, as well as being capable of matching the expected return marketed in the takaful policy. At the present moment, the policyholders (participants) are satisfied with the current products and the returns that they received. However, continuous improvements must become the agenda of takaful operators to ensure the relevancy of the products and sustainability of the returns. This study has been constrained by a lack of data re actual takaful policies (products) sold by the takaful operators (due to commercial sensitivity of the data). Such data would enable readers to decipher critical information, especially on the concentration of products focused on or emphasised by takaful operators. Nevertheless, this issue is mitigated through the use of the respondents' questionnaire feedback on the takaful policies sold by their companies.
For future research, a replication of this study may be executed in other country or region, to determine whether similar traits exist amongst takaful operators, and also to account for differences between different populations' needs and demands.This will contribute to further understanding of takaful operators' investment practices and their relationship to the set of investment products offered.