With the amount of growth occurring in the region, coupled by a boom in project and infrastructure financing across Asia and the GCC, the Takaful market is set to benefit from focusing on the Asian market. NAZNEEN HALIM explores the prospects within the region.
Takaful and re-Takaful players across the world’s major markets are across the world’s major markets are discussing in creating strategies and re-thinking opportunities on all fronts, from product development and innovation, new markets, marketing strategies and investment opportunities. Standards and regulations have also become an integral part of the growth of the Takaful and re-Takaful industry, with financial reporting and risk management key areas which are in dire need of attention. Experts believe that the Takaful industry is still evolving and needs to innovate particularly in the areas of asset management, Sukuk and risk hedging. “These are important areas for Takaful where good asset-liability matching is paramount with secure and competitive returns,” ,” said Ajmal Bhatty, president and CEO of Tokio Marine Middle East in the UAE.
The global credit crisis has not helped with the sector’s growth either, with market players citing it as an indirect cause of its stymied growth. Malaysian based practitioner added: “The crisis has in one way or the other negatively affected all financial institutions, both Takaful and conventional. The direct consequences were felt on both the bottom and top-line, with lower returns for both shareholders and Takaful participants/insurance policyholders and slower new business growth on the back of a slowing or contracting economy. For Takaful in particular, we have observed a notable slowdown in the set-up of new operators in recent years; which is a direct cause of the capital crunch.”
He also commented that the re-Takaful market has not been experiencing a slow-down as far as new operators are concerned and that new players continue to enter the market due in part to lower entry costs and the fact that they can write business globally unlike their counterparts on the direct side. “However, what we experience is a high degree of overcapacity on Family and General Takaful retail lines as too many re-Takaful operators are competing for a smaller than expected Takaful business.”
Leading the pack
The Malaysian Family Takaful market is currently estimated at RM4 billion (US$1.27 billion) and constitutes the largest Family Takaful market in the world, holding 73% of total contributions; followed by the Middle East and Africa at 25%. In terms of sophistication, the Malaysian market is still touted as the best-governed and regulated jurisdiction for Takaful, under the watchful eye of the central bank, Bank Negara Malaysia (BNM). Takaful businesses in Malaysia are subject to the Takaful Act 1984, which was enforced on the 1st January 1985 to provide regulations for Takaful businesses in Malaysia and all matters encompassing Takaful.
Although considered one of, if not the largest Takaful market in the world, Takaful penetration in Malaysia is still relatively low compared to the conventional insurance industry. Even Family Takaful, the largest market segment in the Takaful industry still stands at a mere 11% compared to conventional life insurance at 43% of the population. Takaful operators however are not discouraged by these numbers, and see growth opportunities in this largely untapped market.
Strengthening ties between the GCC and Asia is also expected to be a main push factor in the growth of the reinsurance market, with market players expecting a continuation of capital injection from Asia into the GCC; driven primarily by the desire to partake in soft and hard infrastructure projects, and increasing demand for oil exports.
Medical and health insurance which is expected to be the fastest growing line of business in the GCC, fuelled compulsory insurance requirements which are reshaping some of the region’s non-life markets, particularly in Saudi Arabia. The engineering and construction business ranks second, reflecting a strong rebound after the financial crisis and the subsequent economic downturn. Energy business is also expected to continue to grow on the back of additional on-shore facilities, whilst Family Takaful and General Takaful, which are required by banks for mortgage loans, are also sectors fuelling the demand for reinsurance in the region. An industry player said: “The construction, property and health lines of business offer major opportunities to insurers and reinsurers operating in the GCC.”
Tackling funds
According to the 2011 Ernst & Young report, Shariah compliant funds totalled to US$58 billion, whilst global Shariah compliant assets are estimated at US$300 billion. The difference of US$242 billion are regarded as institutional mandates, which have not been invested in either mutual funds or unit trust funds, but are instead assets that are managed by fund managers as a segregated account. Therefore, in Malaysia for example, its Shariah compliant fund managers such as BNP Paribas, Nomura Asset Management and AmAsset Management currently manage assets in domestic unit trust and institutional assets from outside of Malaysia; particularly in the Middle East.
On the buy-side of the asset management industry are the Takaful operators, who are crucial in the asset-liability matching process for the institution. According to Norlia Mat Yusof, chief investment officer at Etiqa Takaful, the major challenge to Takaful operators at present is to minimize the duration gap as assets continue to increase, and to seek alternatives in the market outside of the traditional Sukuk and equities investment channels. “We (Takaful operators) have begun to look at alternative classes such as property and private equity. However, in the case of private equity, the risk associated with its returns are higher; with a risk-based charge of 35%. This reflects the risk associated with the returns.” Essentially, she added, Takaful players are still seeking the elusive longer-dated Sukuk.
According to Norlia, Life and Family funds usually have a longer duration of 20-25 years as compared to General funds which have a shorter duration. As there is a scarcity for longer-duration funds in the market, fund managers are presently struggling to seek long-dated Sukuk.
With regards to pricing, Norlia stressed the importance of meeting with asset-liability matching and ensuring that products be delivered as it had been priced and to take into consideration the implication of currency exchanges when overseas transactions are involved. She added that further considerations are needed due to limitations and future risk-based charges in addition to the 10% restriction per fund as dictated by Malaysian Takaful guidelines.
Daniel Choong, executive director and head of business development at Nomura Islamic Asset Management also shared his perspective from a fund manager’s point of view, stating that at present, opportunities in the Takaful market are currently rife, on the back of excellent growth in the GCC and Malaysia. However, he added: “We are seeing a slowdown to a certain extent, and seeing emerging markets gaining traction in terms of Takaful penetration. There has also been talk about Malaysian players exploring Indonesia, given the tremendous growth rate of over 5% in the republic over the last few years. In terms of penetration, there needs to be sustainability in the market. Regulators in the Middle East – the GCC and UAE – are typically viewed as more lax compared to Malaysia. For instance, Malaysian Takaful operators have limits to their overseas investments, and even for segregated mandates.
“However, what we experience is a high degree of overcapacity on family and general Takaful retail lines as too many re-Takaful operators are competing for a smaller than expected Takaful business,” said an industry player.
Global scale
Perhaps the most pressing need in the market is to create momentum through increased demand for Takaful and re-Takaful products. And what better way to do so than to introduce a Shariah compliant option to the world’s leading insurance companies. One such effort has recently been mobilized in the UK, with Cobalt Underwriting looking to transform the existing investor base for the global Sukuk market.
David Testa, CEO of Armila Capital and a non-executive director of Cobalt Underwriting explained the company’s mission: “At the moment, there are very few institutional investors that require Shariah compliant products – some of these investors are now buying Sukuk, but that it is out of choice, not necessity.” He believes that by introducing global insurance companies to the Islamic finance sector, those companies will need to invest their Shariah compliant insurance premiums into Shariah compliant investments, with the Sukuk market being the direct beneficiary of this new and fast-growing necessity, particularly in the development of more highly-rated and liquid Sukuk issues.
“Cobalt aims to work with the global Islamic market – and although we are based in the UK, it is not strictly speaking a target market for Cobalt, it is instead the best place in which to base Cobalt’s operational center, because of the Islamic expertise in the City of London and the proximity to the London insurance market,” Testa added.
Richard Bishop, CEO of Cobal Underwriting further elucidated the group’s mission, stating that it aims to address the global needs of large corporate buyers “anywhere in the world”. He said: “We see the market place as significant, as this would include any Islamic corporation or institution acquiring an asset anywhere. We have developed, in conjunction with the scholars, a unique model that replicates the London Subscription Market in a Shariah compliant way.”
Bishop also sees Cobalt’s endeavour as a cutting-edge product in the Takaful market. “As we are about representing a panel of insurers, we think it may be some time before there will be anyone who has sufficient knowledge of both Shariah compliance and insurance to create a similar vehicle and where they can also identify sufficient demand in order for another market to develop,” he said. Insurance, whether Shariah compliant or not, he says, is the only cost effective way for corporations and institutions to protect their assets. He believes that this trend will proliferate across the globe, and not be confined to just the West, as it is now. “At present, in the West, levels of insurance buying are significantly higher than in other parts of the globe, but as individual countries develop and become wealthier, the importance of having a secure and well-rated insurance industry becomes ever more paramount.”
Plugging the gap
The lack of suitable Shariah compliant investments is probably the biggest challenge operators are facing currently, besides competitive pressure. This is difficult for the industry to rectify without the full backing from regulators. But even then, it is still viewed as a mammoth task. Malaysia is a case in point where Bank Negara Malaysia is pro-active in closing the duration gap and investment options. But it is still far from sufficient to fulfil the operators’ needs. This is reflected in lower returns for Takaful operators compared to their conventional peers.
Experts believe that this could be remedied by operators who could cushion the impact by limiting the exposure to implicit long-term guarantees. “Implicit, as by definition there should be no explicit investment guarantee under Takaful. But the mandatory Qard requirement in under most regulations and a lack of transparent and true risk-sharing principles in the Takaful contract wordings are ultimately nothing but indirect guarantees the operator has to fulfil,” said an industry player.