Islamic Banking, Accounting and Finance International Conference- The 9th iBAF 2020
90
Islamic Banking, Accounting And Finance International Conference–
The 9
thiBAF 2020
The Application Of Blockchain Technology In Family Takaful As Catalyst In New Normal Environment
Wahyudin Mohd Tayib
Faculty of Economics and Muamalat, Universiti Sains Islam Malaysia (USIM) e-mail: wahyudinmohdtayib@gmail.com
Abstract: The detrimental growth of new business contributions in Malaysia Takaful market for 1st half 2020 due to COVID-19 pandemic indicated the market required new catalyst to the way of doing business. The objective of the study is to explore the benefits of blockchain technology in family takaful. The study applied a semi-structured interview with the takaful practitioners in the market has listed five potential benefits that can be offered by blockchain technology in the area of product development, operation and distribution channel. The study aims for the viability of the blockchain in Family Takaful can be explored by the players.
Keywords: Takaful; Blockchain; Fintech
1. Introduction
Coronavirus disease (COVID-19) is an infectious disease caused by a newly discovered coronavirus. As of June 2020, there are more than 7.9 million confirmed cases with 434,796 deaths in 213 countries (WHO, 2020).
Malaysia’s economy is projected to contract by 3.1% in 2020 due to a sharp slowdown in economic activity caused by COVID-19 (World Bank, 2020). Insurance sector included family takaful has signalled the negative trend as reports from reinsurers for 1st quarter 2020 have shown the impact of COVID-19 pandemic is hitting the underwriting and investment side of balance sheets (IFSB, 2020). Family Takaful is products offer protection against the risks of death, permanent disability and the plan normally attached to the medical benefit to cover the cost of healthcare. The participant also benefits from long-term savings and investment returns (Eldaia, Mohd Hanefah, Marzuki, & Shatnawi, 2020).
Table 1: 1H New Business Contribution for 2015 to 2020 For Malaysia Takaful Operator Period
1H = Jan - June
Product
Ordinary Investment-Linked Total
2015 1,510.40 374.8 1,885.20
2016 1,634.30 434.7 2,069.00
2017 1,757.30 466.6 2,223.90
2018 1,970.30 540 2,510.30
2019 2,796.40 457.5 3,253.90
2020 2,873.40 318.4 3,191.80
Source: Bank Negara Malaysia Monthly Highlights and Statistics August 2020
Table 1 recorded the new business contribution for Family Takaful in Malaysia for the first half of the year for the period 2015 to 2020. New business contributions are used to reflect the growth in the Takaful industry. The contributions for January 2020 to June 2020 was contracted 1.9% against the same period for 2019. The shortage of
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RM62 million contributions is the first since 2016 and Malaysia Takaful Association chairman Muhammad Fikri Mohamad Rawi admitted that the takaful sector is unlikely to achieve the 25% penetration rate goal set by Bank Negara Malaysia’s Financial Sector Blueprint 2011-2020 (Olano, 2019). Technology enhancement had been identified as the important elements in the insurance industry to survive from the slowdown due to COVID-19 (Babuna, et al., 2020). Since 2015, the Securities Commission (SC) and Bank Negara Malaysia (BNM) undertaking the movement in fintech development included blockchain technology (MyGov, 2019). Blockchain technology is a distributed database of records, or public ledger of all transactions or digital events that have been executed and shared among parties (Crosby, Nachiappan, Pattanayak, Verma, & Kalyanaraman, 2016). What is the benefit of blockchain technology to the Family Takaful? The objective of the paper is to study the potential benefits of blockchain technology in family takaful with the aim for the findings to be a drive for the takaful industry to explore the adoption of the blockchain technology.
2. Materials and Methods
This study applied a qualitative study as data collected through systematic journals review and non-structured interview session with target group i:e takaful industry practitioners. The study applied two steps of the procedure.
First, to collect the information on the blockchain technology and concept based on the journal's review. Second, to discuss the application of the technology to the takaful processes. The denaturalized transcription method used to convert the interview responds to the findings. Denaturalized transcription is flowing, presenting ‘laundered’ data which removes the slightest socio-cultural characteristics of the data or even information that could shed light on the results of the study (Mero-Jaffe, 2011). The outputs from the respondents reconciled with the other studies and market data to reflect the practical implications.
3. Results and Discussion
The study list five potential benefits of blockchain technology in family takaful.
3.1 Blockchain Enabler the Product Integration
There was a perception that takaful and conventional insurance are similar in product nature (Mohd Amin & Abdul Hamid, 2014). Takaful product should manifest more shariah elements as encouraged by the Bank Negara Malaysia for the operators to integrate Waqf, Sadaqah and Zakat in products offering (Mohamad Zahid, 2019). The main challenge to attach said elements in family takaful product is due to lack of monitoring platform for the waqf/zakat institutions to the fund activities both tabarru and investment by the operator (Nik Abdul Ghani & Mohd Sabri, 2020). However, the integration is possible with the availability of smart contract in blockchain technology. A smart contract may provide comprehensive monitoring of data, transparency and openness of operations in investment activities (Ablyazov & Petrov, 2020).
3.2 Improve The Accuracy And Turnaround Time of New Business Acceptance
The real-time data of blockchain technology may speed up the process of gathering the medical data and the acceptance of the new business in the process known as underwriting. Underwriting is the most complex process in the acceptance of insurance/takaful proposed coverage where operator using a wide assortment of data, to predict the likelihood claims will be made against and to price the takaful products accordingly (Raheman, 2011). The available data through blockchain may eliminate the time-consuming manual consolidation of medical information and internal approval. The proposal may improve the new business processing time and more accurate risk rating from the underwriting. Sound underwriting performance is a key element in determining a takaful operator profitability and income generation (IFSB, 2020).
3.3 Simplify Claims Management Process
The online medical database may speed up the claims settlement as the critical info such as date of treatment, diagnosis and costs may be directly assessed by the takaful operator. Bank Negara wants to see common complaints against the insurance industry including delays in claim settlement to be solved (The Star, 2015). A good claims experience may increase the certificate persistency in takaful market as the result showed claims households during the policy period are more likely to renew their policy for the next period (Salleh, Ghazali, Yazid, Wan Daud, &
Abdul Razak, 2018). Blockchain technology also may prevent fraud claims that may result in a monetary loss for takaful operators. The technology may be detecting, validating and auto-adjudicating the medical claim errors,
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rejections and potential denial issues in real-time by comparing set of known references and identified medical billing information produced by the group of medical billers that are stored and verified by a live crowdsourcing data or live forum (Nair, 2019).
3.4 Promote Data Transparency in Family Takaful
Proposed person cover should fully disclose the medical histories and the non-disclosure may result in claims rejection and certificate cancellation. Non-Disclosure refers to a situation where a customer fails to reveal a relevant fact when applying for or renewing takaful contract (Yeasmeen, 2015). Smart contract in the blockchain may evade the scenario. The smart contract incorporates the different aspect of Takaful business transactions included new takaful application (Abdeen, Jan, Khan, & Ali, 2019). The application may see any false declaration by the applicant will be validated by the blockchain platform that consolidated the medical histories from the industry data. Any contradicted info will be rejected upfront and the tabarru fund preserved the value as financial management centred by justice, honesty, and transparency (Arofah, Puspitasari, & Farida, 2019)
3.5 Suitable for The Direct Distribution Channel Initiative
The protection gap in family takaful in Malaysia is largest for the younger age group (i.e. age 30 and below) and these groups incline to participate in Takaful without the assistance of agent (MTA, 2020). The direction by BNM is for the takaful operators to offer commission-free takaful products through the direct distribution channel and appropriate tools for consumers to conduct self-assessments of product’s suitability to their needs, financial and risk profiles (BNM, 2018). The platform can be developed by the Blockchain technology to supply the customer data integrate with the artificial intelligence of takaful core system in the event of life marketing i:e revealing the customer's attitude and behaviour via initial research, product inquiry, purchases, and claims, and the chatbot i:e the inventions that help potential customers to answer basic questions through online conversations or messaging (Singh
& Chivukula, 2020). The initiative is a perfect tool to be introduced during COVID-19 pandemic time where traditional face to face sales is not the ideal scenario.
Table 2: Family Takaful Net Contribution and Net Commission for 2015 to 2019 Period Net Contributions
(RM Million) Net Commissions
(RM Million) % Of Net Commission/Net Contributions
2015 5,104.3 806.0 15.8
2016 5,743.9 840.9 14.6
2017 6,351.0 921.0 14.5
2018 7,315.4 1,115.9 15.3
2019 8,607.0 1,224.3 14.2
Source: Bank Negara Malaysia Monthly Highlights and Statistics August 2020
Table 2 showed the BNM data on the annual net contribution and net commissions paid to the agent by the takaful operators in Malaysia from 2015 to 2019. On average, 15% from the annual takaful contributions had been paid for agents’ commission. Therefore, the family takaful pricing in Malaysia can be 15% lower by the availability of a direct distribution channel backed by the blockchain technology.
4. Conclusion
1. The study listed five possible benefits of blockchain technology to the family takaful industry in Malaysia. The listed benefits covered the elements of business development, product, operation and governance. The MIGHT General Survey finds fintech and healthcare as the areas greatly benefit Malaysia from blockchain adoption (MyGov, 2019). The two areas are strongly related to family takaful and testament on how the blockchain technology is one of the ways to moving forward in the takaful industry. Detail study should be conducted with the feedbacks from regulators, takaful association and blockchain expert to determine the viability and challenges of the application blockchain technology in family takaful. The insurance industry had been listed as one of the ten industries to be integrated into blockchain technologies in the next three years (Accenture, 2018). Hence, COVID 19 pandemic is a blessing in disguise as the unprecedented crisis could be accelerated the adoption of new normal
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