Porter's Five Forces and Insurance/Takaful Industry

In modern and challenging business environment, most of organizations may use Porter's Five Forces to analyse their industry analysis and to develop a proper business development plan. Developed by Michael Porter of Harvard Business School in 1979 and forces are listed as follows :-

a) Intensity of Competitive Rivalry
b) Bargaining Power of Suppliers
c) Bargaining Power of Customers
d) Threat of New Entrants
e) Threat of Substitute Products

In Insurance and Takaful Industry, In Malaysia for instance, the number of insurers are 46 (BNM Annual Insurance Statistic 2009) as compared to 49 companies in 2008. The number of Takaful Operators has increased to 8 (Takaful Annual Statistic 2009) as compared to 5 in 2005. These represents as the intensity of insurance and takaful providers in Malaysian market.

Bargaining power of the suppliers has been determined by the coverage availability by the reinsurers (insurer of the insurers/takaful operators). The negotiated terms and acceptable rating will enable direct insurer/takaful operators to offer competitive products and best terms to consumers.

Customers motives will be highly dependant by the competitiveness of the product offerings as well as service deliverables by the insurers/takaful operators. High pricing of products will make the consumer to switch to other insurance/takaful providers provided the switching costs is comparatively low. For instance an individual may renew his motor insurance from Insurer A to Insurer B if he finds that the later can offer the best rate and terms.

In Malaysian context, the emergence of the insurer/takaful operators are governed by BNM. BNM will issue the licenses and approval before a company can enroll and selling their products. With the corporate governance, Risk Based Capital structure in place, stringen compliance to Security Commission guidelines and procedures ensure the stability and reliability of the insurers/takaful operators. These has minimise the opportunity for the new entrants into the industry.

Substitute to the products is very scarce except for big corporation that might to have arranged the insurance needs through self insured or captive markets.