COVID-19 Pandemic: Implications for the Takaful Industry

The devastating human and social impact of the COVID-19 pandemic and social-distancing measures put in place to curtail the spread of the disease is currently affecting the financial services sector including the takaful industry. Given the important role of takaful as a tool to ease the stress and financial safety net during crises, takaful operators have been focusing on supporting customers and businesses and have continued to pay claims on many policies. The direct impact of the pandemic is likely to be felt across core business lines - namely, motor, medical/health, property, and liability coverages considering their sensitive economic conditions.


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The sensitivity to the pandemic is greater for the medical/health business and family segments, particularly, if the pandemic persists and results in subsequent waves of mortality losses. Exclusions are expected to limit COVID-19 pandemic-related losses for takaful operators, but inconsistency in the treatment of exclusions could lead to consumer anger and the potential risk of litigation as experienced in some countries.


This also has reputational implications if not properly managed. It is crucial at this time that takaful operators should make it clear in their communications, including on their websites and apps, the different solutions available to customers, and the scope of their cover, including the exemptions that apply and the impact of COVID-19 on their policies. Takaful operators must adopt a more responsible and business-sensitive position on the COVID-19 pandemic or risk long-term damage to the trust and reputation of the industry.


Many supervisors have taken regulatory actions to support business continuity and fair treatment of consumers, as well as prioritizing their monitoring efforts on timely handling of payment of claims and ensuring operators have sufficient liquidity. Ultimately, takaful operators are expected to handle claims with utmost good faith and to deal with complaints genuinely, promptly, fairly, and consistently. Many operators are taking actions to support customers, for instance, with regards to a grace period on payment of contributions to assist consumers affected by the COVID-19, discounts, fees waivers, and payment deferrals. Taking into account the anticipated low claim ratio in motor cover due to a lockdown and closure of businesses, supervisors have recommended that operators pass on the benefits of a low claim ratio to customers by granting a free one-month extension of coverage to customers. These various measures will help operators and consumers to cope with the disruption caused by the COVID-19 pandemic and strengthen the latter’s confidence in the industry.


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Furthermore, the pandemic is currently presenting considerable operational challenges to the takaful operating model in many ways, similar to the challenges faced in all industries across the globe. Indeed, it is affecting every facet of takaful operations - from frontline sales to underwriting, to back-end policy administration, to claims management. The behavioral and economic impact of the pandemic will hinder takaful operators’ mid - and longer-term growth and profitability. The most immediate impact on the business model is that some functions, such as claims adjusting, typically require employee presence in the field. Even those who technically can work fully from remote locations may initially have to struggle to adjust to this new way of working. Remote working tends to inhibit cross-functional collaboration - which is particularly crucial for claims, underwriting, and actuarial functions. It can also make decision - making more inconsistent on multiple levels – from executives steering the portfolio to frontline workers making claims and underwriting choices, resulting in higher leakage and potentially poor results.


During the pandemic, the use of technology - ‘contactless’ online purchase and information acquisition has become a way of doing business, when in-person communication and the traditional agent mechanism are not possible. Takaful operators are generally starting to embrace new tools for sales and marketing, streamlining their processes (such as claims handling) and offering a smoother customer experience. Some supervisors, have activated the electronic payments system to facilitate payment of claims and benefits to customers and to enable the online collection of premiums by working with online payments companies, using credit and debit cards, as well as adopting mobile wallets. A similar model has been used in settling payments due to service providers, especially in the medical/health business lines. The issues of data privacy and cyber risk are also on the front burner. Takaful operators, by the nature of their business, compile and aggregate large volumes of data that may require subscribing to an external third-party cloud service provider. This presents myriad risks, including, but not limited to, cloud concentration risks due to the operational centrality of computing services. This can result in an operational halt in the event of a cyber - attack, data breach, connectivity breakdown, etc. The effects of such failures on perceptions of data integrity may also have implications for public confidence in the technology. In addition, there are concerns relating to mitigating operational risks that may crystallize from using legacy technology infrastructure to cope with the rate and speed of technological transformation today.


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It is projected that the cost of global cybercrime will reach USD 6 trillion by 2021. While this presents opportunities for takaful operators to underwrite cyber-takaful as takaful participants increase their demand for mitigation of cyber risks, it may also create the issue of “ silent cyber”, otherwise known as non-affirmative cyber which describes the cyber risk that is neither expressly covered nor excluded in insurance policies, in simple terms, gives rise to coverage uncertainty.


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Assoc. Prof. Dr. Ahcene Lahsasna
Chief Executive Officer,

Shariah Advisory

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