It does not take an expert analyst to tell you that the Takaful industry is almost guaranteed to continue demonstrating its exponential growth. Since the inception of its modern day incarnation, Takaful has successfully managed to maintain this stellar performance trajectory, riding the wave of financial product uptake across the developing markets of the GCC and Southeast Asia.
However, the increasing size and scale of the Takaful industry as a whole is beginning to place excessive pressure on several core business activities, further exacerbating many of the underlying issues that have gone unaddressed or ignored as a result of the drive towards increasing capacity and scale.
These issues are now at the forefront of a move to bring the Takaful industry into line with that of the conventional, increasing both Takaful’s credibility and its ability to contribute to the greater economic security of the region. It should be noted that growth is always easy from a near-zero base, as was the case for Takaful. But, caution accepted, the numbers remain impressive: particularly against the economic backdrop that has brought the world’s advanced economies to a halt and reduced the conventional insurance market to single digit or even negative growth.
However, an over-concentration of start-up Takaful operators in key markets combined with an over-reliance on certain business lines and investment income is diluting Takaful’s future prospects in an increasingly competitive and crowded market. While most agree that the Middle East’s Takaful market is overcrowded, not everyone believes this is a cause for concern. Perhaps it will instead allow stronger players to emerge from the expected consolidation that is likely to occur in the not too distant future.
Due to its growing popularity, Takaful has emerged as a strategic and preferred insurance solution backed by years of reinforcement, creating an ever stronger foundation for Islamic Muamalat. With the majority of operators continually posting strong revenue and continuing profitability, Takaful is beginning to exert greater influence upon the general market, undertaking aggressive marketing strategies, rolling out new investment-linked products and pushing the significant expansion of their agency networks as a way to meet revenue growth expectations.
The number of operators coming online in the last five years has also led to significant downward pressure on pricing. To ensure the sector’s longer-term viability, operators need to improve their ability to retain earnings within the Takaful fund and focus on product differentiation as opposed to competing on price.
There has been a traditional ambivalence to insurance in the key constituent Takaful markets and although this is changing with the help of government initiatives and the introduction of mandatory motor and health cover, it will not happen overnight. Public awareness and educating the distribution channel is a key part of overcoming the aversion to Takaful. If the Takaful market continues to grow, some have suggested that it could even begin to target territories beyond the Islam-dominated Middle East and Southeast Asia.
However, if Takaful operators were to expand into geographical regions with higher penetration rates some of their current advantages would dissipate. They would be in effect cannibalizing the traditional market and they would have to battle for business. Many observers believe that this is exactly what the industry requires as it would bring the inherent ethical sensibilities and considerations of the Takaful proposition to light. While the majority of policy uptake is primarily dependent on pricing, negligible differences may be overcome on the basis that the Takaful product is a more ethical and fairer means of insuring against risk.
Ultimately, Takaful faces the same underlying issues as the conventional insurance industry and it has to be increasingly aware that it must maintain adequate premiums for the risk undertaken or it may face future unprofitability and ultimately risk damaging its public perception.