The Islamic insurance – or takaful – market is poised for a massive surge. “By 2020, worldwide takaful premiums could increase tenfold”, says Hugues de Roquette-Buisson, regional manager for Africa and the Middle East at AGF Insurance, a subsidiary of global insurer Allianz. The firm cites worldwide takaful policy sales growth rates of between 15-18% annually.
But this growth is from a low base, with takaful policies still accounting for less than 1% of the worldwide $1.6 trillion insurance book, and insurance penetration in the Muslim world estimated by insurers at below 5%. “The potential is definitely there – and the outlook is good. However the Middle East market is not even in infancy yet – we’re just emerging from the embryonic stage,” comments Abdallah Kubursi, regional vice-president AIG Takaful–Enaya.
Early stages still
Malaysia’s Islamic insurance market is in many respects leading the way, thanks to the efforts of central bank chief Zeti Akhtar Aziz, among others. The country established its takaful industry 15 years ahead of the Middle East and, at 7%, has the highest penetration of takaful compared to conventional insurance of any country. But even Malaysia has barely taken off: “We are not even talking adolescence yet,” Kubursi tells Emerging Markets.
Takaful is expected to contribute 20% to the overall Malaysian market in the medium-term, a recent Standard & Poor’s (S&P) report forecasts. A weighty takaful market could now be evolving in the Gulf Cooperation Council (GCC) region, where economic diversification and product under-penetration is driving growth rates of “about 40% per year”.
Takaful contributions (equivalent to gross premiums written) amounted to just below $170 million in 2005 across the GCC, where conventional insurance premiums are generally put in the $6-8 billion bracket. Yet, “if the world average insurance premium of $550 per capita is achieved and applied to the Gulf states, the GCC insurance market has a potential size of $20 billion,” says S&P credit analyst Jelena Bjelanovic.
“The opportunities for increased uptake of takaful in the GCC are positive because the considerable economic growth in the region, coupled with a sizable, under-insured population, means that there are substantial prospects for further development of personal lines cover,” she explains.
A 65% increase in profits was achieved in 2006 by the largest Islamic insurance operator in the world, the UAE-based Salama Islamic Arab Insurance Company, which has recently expanded its Middle East coverage to Algeria, Egypt, Senegal, Tunisia and Saudi Arabia.
The Saudi market saw Saudi British Bank’s insurance subsidiary SABB Takaful raise a six times over-subscribed SR35 million IPO in March 2007. AGF writes takaful business in Bahrain and Saudi Arabia, and is now eyeing Egypt. De Roquette-Buisson refers to takaful as “a good lever to expand our activities in the region”.
Industry hurdles
Takaful is not a new concept. It is the oldest form of insurance, based on the idea of co-operative risk-sharing, where a community of insured parties pays into a fund, which then aids each member in case of a loss. However, the Grand Council of Islamic Scholars, the Maja-al-Fiqh, only approved takaful as a sharia-acceptable alternative to traditional insurance in 1985.
Bjelanovic underlines the relatively unproven nature of the sector, stressing that the speed of growth of the takaful industry will “depend on its ability to offer the same choice, range of products, level of cover, cost-effectiveness, and, ultimately, quality of policyholder security, as traditional insurers.”
The right staff
The recruitment of able staff has become a burgeoning priority for Islamic insurers everywhere. At Allianz Life Indonesia, which started selling sharia-compliant insurance in April 2006, “we are holding continuous training sessions to certify sharia agents,” Jens Reisch, country manager, tells Emerging Markets.
“The lack of skilled staff is a concern – I have trouble finding the right staff,” says Kubursi. “People come over from conventional insurance, often with a lot of experience in product development and marketing, but it is a learning curve to do so, in terms of the sharia-compliance nature of the business.”
Other barriers to a sustained and viable takaful market cited by Kubursi include limits on product variety, the difficulty of a young industry in obtaining ratings, and the lack of retakaful (reinsurance) capacity in the market. “On the conventional side, one can secure $10-30 million per line of business on reinsurance, but with retakaful, one may be able to find $2-5 million per line per carrier provided by about 10-15 carriers,” he observes.
According to S&P, the takaful market’s historically low levels of quality reinsurance capacity have swayed the sharia boards of direct takaful companies to “temporarily” allow the use of traditional reinsurers. The main difference is that takaful companies are not allowed to accept reinsurance commissions, but they can accept the surplus distribution from retakaful companies.
A few well-known international reinsurers have begun to obtain licences to establish Islamic-compliant reinsurance operations around the globe. In September 2006, for example, the Central Bank of Bahrain (CBB) granted a licence to Hannover Re to establish an Islamic reinsurance company. As the primary takaful market grows, “we can expect increased retakaful capacity and participation,” S&P predicts.
Another layer of policyholder security is provided by the gradually global nature of regulatory frameworks, aided by initiatives such as the CBB’s Insurance Rulebook, issued in 2005, which sets the region’s first comprehensive regulatory framework specific to takaful and retakaful companies. However, “there will not be standardization for some time,” argues Kubursi.
For more detail on the Pakistan takaful market, see "Times of change for Pakistan".