Determinants of Composite Takaful Operators’ Financial Performance

Transcription

1. Global Business and Management Research : An International Journal Vol. 12, No. 4 (2020) Determinants of Composite Takaful Operators’ Financial Performance Nur Izzati Ibrahim1 Faculty of Business & Management, Selangor Campus, Universiti Teknologi MARA Amirul Afif Muhamat2* Faculty of Business & Management, Selangor Campus, Universiti Teknologi MARA Email: amirulafif@uitm.edu.my Azreen Roslan3 Faculty of Business & Management, Selangor Campus, Universiti Teknologi MARA Mohamad Nizam Jaafar 3 AAGBS, Universiti Teknologi MARA * Corresponding Author Abstract Purpose: This study assessed the determinants that influence takaful operators’ financial performance because takaful operators need to consider the determinants so that the companies able to fulfil their roles without serious financial problems. Design/methodology/approach: This study used secondary data to assess the financial information from 2007-2016 of the composite takaful operators gathered from the Central Bank of Malaysia. Findings: All determinants displayed positive relationship except profit rate and retakaful. Research limitations/implications: Limitation of the study is that the data should be separated into the line of businesses either family or general takaful business. Accordingly, the limitation can be future area of research that can be executed in order to understand and perhaps produce a model that will be unique for takaful operators. Keywords: takaful, composite, family takaful, general takaful, insurance Introduction There are numerous studies focused on performance of takaful operators especially in Malaysia. Nevertheless, such performance was demarcated into several components such as financial performance (Ismail, 2013), corporate social performance (Muhamat, Jaafar & Basri, 2017) and agents’ performance (Muhamat et al, 2018). Ismail (2013) advised that studies on takaful operator’s financial performance is limited due to the lack of data and empirical evidence on this area. Therefore, this study focused on the recent takaful operator’s financial reports specifically for the family takaful operators in order to assess the determinants that influence the financial performance. Previous studies had discussed in-depth on the general takaful operator’s financial performance, moreover, family takaful is a lucrative segment for the composite takaful operators (before the requirement of the Central Bank to split the composite takaful business into family and general takaful). 331
2. Global Business and Management Research : An International Journal Vol. 12, No. 4 (2020) Literature Review This study has extensively reviewed previous studies on the financial performance of takaful operators. i. Return on investment, return on equity (ROE) and return on assets (ROA) are amongst the popular proxies being used to asses company’s financial performance (Malik, 2011). Ismail (2013) used investment yield is as the proxy since it reflects one of the major activities of the composite takaful businesses. Investment is the main function of takaful and insurance companies in order to mobilise the contribution and premium that received from the participants or policyholders. ii. Profit rate: Ismail (2013) suggest that profit rate contributes to the performance of the takaful operator’s investment which benefited the takaful operator as well as the policyholders. Abduh & Isma (2016) inform that takaful operator’s investment instruments consists of bonds, sukuk and fixed deposit which rely on the profit rate determined for the instruments, and influence the stakeholders’ decisions either to supply more funds or otherwise; instead of increasing the solvency of the companies (Mwangi & Murigu, 2015). iii. Equity return: One of the factors that influence the profitability performance of takaful operation. Equity returns result for the dividend income to the company (Ismail, 2013). Based on findings from Abduh & Isma (2016) indicated that equity return is one of the critical factors that influence profitability of the insurance and takaful companies. The lower the equity index will cause the asset liability mismatch. iv. Size: includes the number of employees, branches and the total asset which pointed by Reshid (2015) to be either positive or negative relationship concerning the profitability. The larger the firm; it will have more resources, better risk diversification, complex information systems and a better expenses management (Burca & Batrinca, 2014). v. Stability of Underwriting Procedure: Ismail (2013) findings informed that by vi. vii. increasing the premium; it will give better financial performance of the takaful companies. Any unfavourable changes to the chain process of underwriting, it can cause lower profitability due to the financial difficulties. A sound process is needed because takaful operator has the fiduciary duty to ensure the business is managed prudently, even though the takaful operator is only acting as agent. The fiduciary duty of the takaful operator requires the shareholders to top up if there is deficit in the risk fund (Muhamat, Mainal, Alwi & Jaafar, 2018). Liquidity: Mazviona, Dube & Sakahuhwa (2017) suggest that companies with more liquid assets are less possible to fail because they can liquidate their cash when there is need for it especially in a dire situation. Abduh & Isma (2016) conclude that liquidity is one of the variables that represent takaful operator capability to pay the liability such as claim and expenses to the policyholders. Retakaful or Reinsurance: Shiu (2004) clarifies that reinsurance or retakaful increases operational stability, greater dependence on reinsurance will reduce the company’s preservation level which can decrease the potential profitability for the insurer. Ismail (2013) suggests that coefficient for retakaful dependence is positively related to investment yield. 332
3. Global Business and Management Research : An International Journal Vol. 12, No. 4 (2020) Method The data were obtained based on the financial statements and additional notes of the companies of composite takaful operators from 2007-2018 from the Central Bank of Malaysia. Model Specification: ROI = β0 + β1 PR+ β2 Eq + β3 LOGSi + β4 ReT + β5 Li + β6 Und + ε it Table 1: Proxies for Composite Takaful Operators’ Financial Performance Variables Return on Investment Measurement Method: Gain of Investment – Cost of Investment Cost of Investment Method: 5 year Malaysian Government Securities (MGS) 5 year Government Investment Issue (GII) Notation ROI Equity return Method: Total equity Total asset Eq Company size Method: Log of total asset (Total contribution earned – Retakaful ceded) Si Underwriting procedure Method: Benefits paid Net contribution Und Liquidity Method: Current Assets Current Liabilities Li Retakaful Dependence Method: Amount of Retakaful Total Assets ReT Profit or interest rate level PR Findings Descriptive results Table 2 show the descriptive statistics of the dependent and independent variables for eight composite takaful operators for ten years from 2007-2016. The tables illustrate the results of the mean, standard deviation, skewness, kurtosis and Jarque-Bera. The result shows that the average return from investment of composite takaful operators was 1.43% with a dispersion of 1.53%. This indicates that the variations of composite takaful operators in Malaysia will not increase above 2.96%. Furthermore, the mean value of company size was 8.25. There is significant variation across the sample takaful operators for the reason of the standard deviation is 0.88. Hence, the presence of significant different in term of takaful operators’ size produce significant impact on the profitability of takaful operators. 333
4. Global Business and Management Research : An International Journal Vol. 12, No. 4 (2020) Table 2: Descriptive results Variables ROI Profit Rate Equity Liquidity Size Underwriting ReTakaful Mean Median Std. Dev. 1.429333 4.196 0.172793 1.271249 8.248357 1.3 3.43 0.108488 1.141641 8.46737 1.527744 4.940751 0.188769 0.699411 0.88485 0.619121 0.545868 0.60241 0.054052 0.031008 0.05531 Skewness Kurtosis JarqueBera 1.399157 3.176488 3.83513 6.159659 -1.43758 6.710182 16.4586 17.16637 40.23818 4.247877 3.905333 20.75926 1.519235 4.400188 40.49252 415.3014 705.7459 20.98654 486.598 2884.589 18.41951 The findings show that R-squared is 0.558 and it means that on average 55.8% of the variation in return on investment (ROI) can be explained by the independent variables under the model above. T-test shows that liquidity is significant with the p-value equal to 0.0495 respectively. Table 3: Random Effect Model Variable C Profit rate Equity Liquidity Size Underwriting ReTakaful R-squared Adjusted R-squared F-statistic Prob(F-statistic) Coefficient -20.7449 0.006384 0.343568 0.581536 2.558765 0.426642 -0.387 0.557912 0.372521 3.009371 0.005865 Std. Error 12.78319 0.038673 2.221646 0.284452 1.511831 0.411739 7.068593 t-Statistic -1.62283 0.165069 0.154646 2.04441 1.692494 1.036195 -0.05475 Prob. 0.1148 0.87 0.8781 0.0495 0.1006 0.3081 0.9567 Correlation Test ROI has a positive relationship with equity return, liquidity, company size and underwriting procedure for composite takaful businesses. There were no variables detected to have correlation coefficients more than 0.8 or less than -0.8 which inferred that each variable is independent from one and another. The results show that the correlation coefficients between pairs of independent variables are less than 0.8, means that there are no serious correlations among the variables. The coefficient estimate of correlation is -0.135 for retakaful and the result suggest that retakaful has negative relationship to return on investment (ROI). Thus, the less funds channeled to retakaful; the better profitability it will be. In addition, profit rate signifies negative relationship to ROI. This is contradicted with most of the previous studies. One possible explanation is that during the study period; there was financial crises from 20072008. 334
5. Global Business and Management Research : An International Journal Vol. 12, No. 4 (2020) Table 4. Model of Determinants of composite takaful operators’ financial performance Independent Variable Composite Takaful Operators Random Effect Model C -0.982114 0.3323 PRL -0.440308 0.6622 SI 1.721838 0.0932* TLLA 1.040067 0.0304** LOGTA 1.436621 0.0159** CGCW 0.064205 0.9491 RTCTA -1.006819 0.3204 R-squared 0.162316 Adjusted R-squared 0.03005 F-statistic 1.22719 Prob(F-statistic) 0.314111 Durbin-Watson stat 0.537139 Notes: 1. Figure in parentheses are t-statistics. 2. ***, **, * denote significant at 1%, 5% and 10% significant level respectively. Conclusion Takaful operators need to consider factors that influence the financial performance of the companies because it will affect the company’s image as well as the growth of the companies in the future. The challenges faced by the composite takaful operators are different from the specialized type of takaful operators. Nevertheless, starting 2018, the composite takaful operators will be separated into specific business according to their line of business either family or general takaful. Limitation of this study is that the data should be separated into the line of businesses either family or general takaful business. Accordingly, the limitation can be future area of research that can be executed in order to understand and perhaps produce a model that will be unique for takaful operators. References Abduh, M., & Isma, S. N. Z. (2016). Dynamic financial model of life insurance and family takaful companies in Malaysia. Middle East Journal of Management, 3(1), 72-93. Burca, A.-M., & Batrinca, G. (2014). The determinants of financial performance in the Romanian insurance market. International Journal of Academic Research in Accounting, Finance and Management Sciences, 4(1), 299-308. Ismail, M. (2013). Determinants of financial performance: The case of general takaful and insurance companies in Malaysia. International Review of Business Research Papers, 9(6), 111-130. 335
6. Global Business and Management Research : An International Journal Vol. 12, No. 4 (2020) Malik, H. (2011). Determinants of insurance companies profitability: an analysis of insurance sector of Pakistan. Academic Research International, 1(3), 315. Mazviona, B. W., Dube, M., & Sakahuhwa, T. (2017). An Analysis of Factors Affecting the Performance of Insurance Companies in Zimbabwe. Journal of Finance and Investment Analysis, 6(1), 1-2. Muhamat, A. A., Karim, N. A., Mainal, S. A., Alwi, S. F. S., & Jaafar, M. N. (2018). Determinants of Agents Performance: A Case Study of AmMetLife Malaysia Berhad. International Journal of Academic Research in Business and Social Sciences, 8(11). Muhamat, A.A, Jaafar, M. N., & Basri, M. F. (2017). Corporate Social Performance (CSP) influences on Islamic Bank's financial performance. Journal of International Business, Economics and Entrepreneurship (JIBE), 2(1), 11-16. Mwangi, M., & Murigu, J. W. (2015). The determinants of financial performance in general insurance companies in Kenya. European Scientific Journal, ESJ, 11(1). Reshid, S. (2015). Determinants of Insurance Companies Profitability in Ethiopia. Addis Ababa University Addis Ababa, Ethiopia. Shiu, Y. (2004). Determinants of United Kingdom general insurance company performance. British Actuarial Journal, 10(5), 1079-1110. 336