Market structure, competitive condition, and performance of the global takaful market
Although the global coverage of the Takaful market has grown substantially since its introduction, there are various aspects of the Takaful market that have not been adequately explored. Studies have previously investigated the organisation structure that influences financial performance, but the...
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| Format: | Thesis |
| Language: | English |
| Published: |
2019
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| Subjects: | |
| Online Access: | http://psasir.upm.edu.my/id/eprint/91235/1/SPE%202020%2035%20IR.pdf http://psasir.upm.edu.my/id/eprint/91235/ |
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| Summary: | Although the global coverage of the Takaful market has grown substantially since
its introduction, there are various aspects of the Takaful market that have not been
adequately explored. Studies have previously investigated the organisation structure
that influences financial performance, but the market structure and competition on
financial performance remain unclear in the Takaful market. Recently, the trend of
consolidation and reforms in the global financial service industry has propelled the
need to establish a sound and efficient financial system in the insurance industry.
Consequently, many of these changes potentially yield significant implications on
the involvement and competition, as well as the economic and financial performance
of the Takaful market. Therefore, this study is specifically aimed to first, examine
the market structure and competitive condition in the Takaful market. In particular,
153 Takaful operators from 14 countries based on availability sampling were
included in the analysis. This study assessed the dynamics of the global Takaful
market competition from 2008 to 2016 using the Herfindahl-Hirschman Index (HHI)
and four-firm concentration ratio (CR4). Furthermore, this study was deemed as the
pioneer to examine the competitive condition of the Takaful market using the latest
competition indicator, namely the PCS indicator. Overall, the Takaful market was
revealed to demonstrate a shift from a highly concentrated market to a moderately
concentrated market with a volatile trend of competition. Second, to examine the
impact of market structure and competitive condition on the profitability of the
Takaful market. The competing and opposing hypotheses that comprised the
structure-conduct-performance (SCP) theory, efficient structure (ES) hypothesis,
and the theory of relative market power (RMP) were included for analysis,
irrespective of whether the profitability of insurers is caused by efficiency due to
competition, market structure or individual market power. Using the two-step system
Generalized Method of Moments (GMM) estimator, the study obtained empirical
evidence that supported the SCP hypothesis. Based on the robust findings, foreign ownership appeared to be the key determinant for the profitability of Takaful
operators.
With respect to the relationship between the competitive condition and financial
stability of the Takaful market, both competition-stability and competition-fragility
hypotheses were also tested given their theoretical ambiguity in literature. The
obtained results appeared consistent with the competition-stability paradigm and the
transmission mechanism hypothesis. Although higher competition in the Takaful
market is unable to assist Takaful operators to generate higher profit, it can enhance
its market stability. Furthermore, there may be performance differences among
Takaful operators according to MENA and non-MENA regions, the types of Takaful
business, and ownership structure. Empirical results indicated that a higher market
share was found to yield higher profitability for composite and family Takaful
operators; thus, supporting the theory of RMP. Meanwhile, the ES hypothesis was
only applicable to general Takaful operators. On the other hand, domestic-owned
Takaful operators appeared to enjoy higher profitability than foreign-owned Takaful
operators; thus, supporting the home field advantage hypothesis. However, there was
no evidence that foreign ownership has any significant impact on the stability of
Takaful operators. Apart from contributing to the literature, this study obtained
essential insights that enhance the understanding of the circumstances of the Takaful
market. Given that stability of the Takaful market can be important for policymakers
in attempting to accelerate Takaful growth, the results of comparative studies
provided significant policy implications for designing and implementing regulations
to enhance market efficiency and to safeguard the interests of policyholders, apart
from promoting the expansion and stability of the Takaful market. |
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