MicroTakaful offers tremendous potential from a social and business perspective, not to mention holding a considerable amount of value and unlocked potential for the global Takaful market, particularly in underdeveloped Islamic finance markets and Muslim majority nations.
The global micro insurance market in terms of size is predicted to have the potential to reach out to an estimated four billion people. According to Swiss Re’s Sigma report this translates to a potential policy uptake in excess of two billion, with an estimated market value of approximately US$40 billion. Unfortunately, the current market size for micro insurance is only 2-3% of this total, standing at between US$8 million and US$1.2 billion, and thus representing a huge market potential for both conventional micro insurance and Takaful.
While no global figures currently exist for the size and extent of global microTakaful uptake and penetration, leading Takaful providers have recognized the potential on offer, particularly the benefits in diversifying their portfolio and services to meet the needs and demands of those requiring affordable protection.
Social value
Cooperative values of self help, solidarity and social responsibility are the cornerstones of the Takaful industry. Susan Dingwall, a partner (Takaful) at Norton Rose, suggests that: “One has to look at the microTakaful market not only as a business opportunity but also as a civic duty to help those less well off.” As well as addressing the needs of those on low incomes, a Takaful operator can leverage off these qualities to create a strong brand image, enhance its reputation and built a significant loyal customer base in emerging markets.
MicroTakaful has grown exponentially in the last few years, in line with the success of the Islamic finance. Market development does however depend to a significant extent on the amount of support offered by governments, many of which have mandatory micro insurance provisions in place. Lower income families by nature of their situation require higher value protection and broader coverage than is made affordable. Broad-based coverage with few exclusions and limited small print needs to be a central tenet of this philosophy.
Challenges to face
Although the levels of growth present in microTakaful are encouraging, with a greater range of opportunities comes an equal number of challenges. Dingwall suggests that there are three challenges currently present in the microTakaful space:
1. Cultural recognition of microTakaful’s benefits;
2. Innovation; and
3. Regulation.
Creating a culture to recognize the value of microTakaful products and changing the mindset of those involved is key. The target market for microTakaful has little knowledge or understanding of the Takaful proposition and therefore does not always see the benefits. However, microTakaful’s sheer simplicity in structuring can prove beneficial to the operators in this instance, by rethinking each of their offerings to provide a needs-based product rather than a scaled-down version of what is currently available.
Innovation needs to be at the forefront of product design. Simplicity and innovation needs to guarantee uptake with minimal input and transactional costs. Increased efficiency and technology are again central but require a large operation and customer base to justify the outlay to the operator.
Balancing regulation
It is necessary to find a balance in the regulation of microTakaful. “There is a fine line between stifling the microTakaful market and protecting the consumer,” says Dingwall, adding that: “Good microTakaful regulation will build on current Takaful regulation with a focus on solvency and making sure that consumers are protected from market abuse.”
Regulators have recognized that having a one-size-fits-all system does not always work, and an idea that is gaining traction is that of a tiered system of regulation that can grow in step with the expansion of the market. As businesses grow and achieve greater economies of scale, regulation can be enforced commensurately. — SW