Published data shows a robust expansion of the Takaful industry with a compound annual growth rate of 38.82% during 2005-2008 (Indian sub-continent:135.13%, Levant: 18.10%, Africa: 18.21%, Southeast Asia: 28.15% and GCC: 44.59%).
According to the Ernst & Young (E&Y) World Takaful Report 2011, the estimated Takaful contributions by the end of 2011, excluding Iran, will approximately reach US$12.14 billion, showing the tremendous potential of the Takaful Industry.
Multiple distribution channels have assisted Takaful operators to reach a broader spectrum of the population in many markets. Overall, agents and brokers are still the dominant channels. However, other distribution channels are gaining ground and are increasingly being developed to compliment the traditional channels. One of the most important distribution channels that is fast gaining popularity in many countries is bancaTakaful.
Although in its conventional form (bancassurance), it is particularly well-developed in Europe, and continues to represent by far the largest distribution channel in markets such as Spain, Italy, and France, it is now also finding fame in Southeast Asia, the Asian sub-continent, and the Middle East.
BancaTakaful, which uses bancassurance as a key growth channel for Islamic insurance, is witnessing positive growth for Takaful products and is now amongst the leading distribution channels in many countries, including the Middle East where it accounted for almost 25-30% of Takaful contributions of some companies in 2010 and 2011.
This positive growth of bancaTakaful has been mainly driven by Takaful operators’ desire to diversity away from costly agency distribution and banks’ interest in broadening their fee-based income.
In the current economic environment where there is stiff competition on consumer propositions, the growth of Islamic banking would provide synergy to the growth of Takaful and the resulting potential, if capitalized properly, through bancaTakaful is enormous. With the development of bancaTakaful in the Middle East, where insurance penetration is low as a percentage of the GDP when compared to the global average, consumers will have greater access to a choice of integrated financial services from banking institutions in a cost-effective manner.
Mixed reviews
However, looking at activities across Southeast Asia, the Asian subcontinent and the Middle East; bancaTakaful, even with its positive growth in the recent years, has received mixed reviews. With few exceptions, half-hearted implementation has prevented organizations from eradicating duplication and exploiting the cost synergies of integrating banking and Islamic insurance operations. Other factors contributing to its limited success include a lack of interest shown by the administration, improper database expertise, failure to incorporate marketing plans, weak product promotions, inadequate incentives to the banking staff, poor distribution channel linkages and negative attitudes toward insurance.
Quite often we often speak about the necessity of having a holistic understanding of the customer’s needs to overcome these barriers. However, even before that, both banks and Takaful operators seeking to form a strategic alliance need to have a clear understanding of the bancaTakaful business they need to set up to ensure its true success.
Forming strategic alliances, and those with some degree of sustainability, is not easy. They involve colossal efforts from the bank and the Takaful operator. Any form of communication between the two during the pre-selection process creates an expectation of what it will be like working together. Effective communication is vital for success and the bank and the Takaful operator must understand each other’s requirements, develop common objectives and be committed to achieving a mutually desired and acceptable outcome. The bank and the Takaful operator must realize that the strength of such strategic alliance depends on the actual strengths they both bring to the business and not their perceived or desired strengths.
Alliances with banks
As a starting point, both bank and the Takaful operator should focus on a well-defined customer proposition instead of searching for the ‘perfect model’. A great amount of time is usually spent over negotiating the commercial terms and conditions even before business operations have been determined and validated. Commercial terms and conditions are important, but what is more important is that both the bank and the Takaful operator believe that the commercial terms and conditions are fair as well as attractive to themselves so they will be fully committed.
Keeping it simple
Keeping it simple is one of the key factors of achieving true success. The right customers need to be provided with products that are attractive through convenient distribution channels. There are many propositions that do not meet the basic criteria of being simple relative to the market. These result in providing products to customer segments that do not require them and it quite often results in policy cancellation, lapses, low persistency ratios, etc. In addition, this also poses high reputational risk for both the bank and the Takaful operator. The advantage of offering simple products is about clear and understandable benefits that need to be clearly communicated to the consumers. Lessons from the other markets should be learnt and their experiences should be tailored to customer demographics, social and cultural norms, regulation, customer preferences and market stage of the development and sophistication.
Conclusion
Execution excellence is the key to achieving true success. To date, most bancaTakaful strategic alliances have probably been going about it in the wrong way. Some have not yet overcome the barriers to success, and those that have, may have put too much faith in choosing the ‘perfect’ model rather than focusing on the quality of their execution.
The prospects for bancaTakaful for the future are bright. It is time to develop a new and clear vision. Our focus should be on what is important and all pre- and post- implementation efforts must be directed towards creating significant and meaningful bancaTakaful strategic alliances. My observation is that bancaTakaful in the Middle East should be more successful than it is and, with the right approach and effort, I am convinced it will be.
Bilal Mahmood is the assistant general manager of business development at Abu Dhabi National Takaful Co. He can be contacted at
[email protected]
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