Comparative study on risk :conventional insurance vs takaful in Malaysia

Abstract

Naturally. both conventional insurance and Takafit! industries are exposed to risks. This study seeks to compare the compare the risks between conventional insurance and takafit!. The study focuses primarily on three key risks. namely liquidity risk. operational risk and underwriting risk. The risks were measured using Mann-Whitney U Test and standard financial ratios commonly used for measuring the performance of insurance companies. namely Combined Ratio and Retention Ratio for Operational Risk. Liquidity Ratio and Technical Reserve Ratio for Liquidity Risk. and finally Claims Ratio and Expense Ratio for Underwriting Risk. A sample of six listed Takaful Operators and nineteen conventional Insurance operators in Malaysia were used for this study. covering the period from the financial year 2007 until financial year 2012. It is observed that based on Mann-Whitney U Test. conventional insurance operators have significantly higher combined ratio than Takajit! operators. while the Takaful operators have a significantly higher retention ratio than conventional insurance operators. In terms of liquidity. there is no significant difference in Liquidity Ratio and Reserve Coverage between Takaful operators and insurance operators throughout the study period. Takaful operators are spending more than conventional insurance firms to run their business. as the expense ratio for Takajit! operators is significantly higher than conventional insurance finm. Keywords: Takaful. Insurance. Liquidity Risk. Underwriting Risk. Operational Risk