Jurnal Ekonomi Malaysia 46(2) 2012 3 - 15 Camel Rating Approach to Assess the Insurance Operators Financial Strength (Pendekatan Penarafan Camel bagi Menilai Kekuatan Kewangan Pengedali Insurans) Rubayah Yakob Faculty of Economics and Management Universiti Kebangsaan Malaysia Zulkornain Yusop Prince Sultan College for Tourism and Management Al-Faisal University Alias Radam Faculty of Economics and Management Universiti Putra Malaysia Noriszura Ismail Faculty of Science and Technology Universiti Kebangsaan Malaysia ABSTRACT This study aims at looking at the financial strength based on the CAMEL rating system for each of the conventional life insurers and takaful operators. The existing financial indicators, such as the margin of solvency (MOS), risk-based capital (RBC) and claim paying ability (CPA) rating,present their own constraints in providing information concerning the financial position of the operators to the policyholders and the public. The data used for the twenty life insurance and takaful companies operating during the period of 2003 to 2007 consists of twenty-three financial ratios. The factors (values) generated by factor analysis applied on twenty-three financial ratios reflect the five components in the CAMEL rating system. The results show that the CAMEL rating is a promising approach in providing an overview of the financial strength of the life insurer/takaful operator for the benefit of policyholders and the public. Keywords: CAMEL rating; Life insurer; Takaful operator; Factor analysis ABSTRAK Kajian ini bertujuan untuk melihat kekuatan kewangan berdasarkan sistem penarafan CAMEL bagi setiap penanggung insurans hayat konvensional dan pengendali takaful. Penunjuk kewangan sedia ada, seperti margin kesolvenan (margin of solvency [MOS]), modal berasaskan risiko (risk-based capital [RBC]) dan keupayaan membayar tuntutan (claim paying ability [CPA]) mempamerkan kekangan mereka yang tersendiri dalam menyediakan maklumat mengenai kedudukan kewangan pengendali kepada pemegang polisi dan orang awam. Data yang digunakan bagi dua puluh buah syarikat insurans hayat dan takaful yang beroperasi sepanjang tempoh 2003 hingga 2007 terdiri daripada dua puluh tiga nisbah kewangan. Faktor-faktor (nilai) yang dijanakan oleh analisis factor terhadap dua puluh tiga nisbah kewangan mencerminkan lima komponen dalam system penarafan CAMEL. Keputusan menunjukkan bahawa penarafan CAMEL adalah pendekatan yang meyakinkan dalam menyediakan gambaran tentang kekuatan kewangan penanggung insurans hayat/ pengendali takaful bagi manfaat pemegang polisi dan orang awam. Kata kunci: Penarafan CAMEL; penanggung insurans hayat; pengendali takaful; analisa faktor INTRODUCTION Rating is intended to determine the relative financial strength of firms in an industry, which could build trust among consumers,promote better corporate governance, competitive advantage, transparency and better company image. Traditionally, notwithstanding that the financial soundness of life insurers is critical, the CAMEL rating has mainly been used to assess the performance of financial institutions and not for insurance companies. If this is questionable, all other evaluation factors, such as product availability, service quality and ethical behaviour, are meaningless (Black & Skipper 2000). In the case of Malaysia, there are several rating systems or financial indicators that aim to provide an insight into the financial strength of insurance companies. Among them are the margin of solvency (MOS), risk-based capital (RBC) and claim paying ability (CPA) rating.