Modern Takaful is a recent phenomenon. This 30-odd year old industry took root in Sudan in 1979; Malaysia embraced it and popularized it and soon thereafter several Muslim and non-Muslim countries followed suit and showed interest both on the governmental or regulatory level and as a commercially viable business investment.
As a sister industry to Islamic banking, Takaful has proven its relevance and resilience in this rapidly changing world of finance, particularly Islamic finance; Global Takaful contributions grew 29% in 2008 to reach US$5.3 billion and remains on course to surpass US$8.9 billion by 2010. Previous forecast for total contributions was US$7.7 billion by 2012 at an optimistic growth scenario of 18% CAGR.
There are an estimated 124 Takaful operators in 20 countries excluding 36 window operations and 15 Operators in Iran complemented by 15 re-Takaful operators. Dr Ahmed Al Janahi, managing director of Noor Takaful, reckons that the industry is growing 35% faster than conventional insurance.
However, one important challenge facing Takaful operators is profitability.
Takaful’s counterpart conventional insurance industry is three centuries old and includes giant companies which are profitable and successful in all business fronts. For Takaful operators to stand their ground and make headway, it is important and crucial that critical success factors are timely identified and strategically nourished.
Some clear-cut disadvantages/challenges faced by Takaful operators and which are impacting performance include:
Industry track record, benchmarks, and best practices are non-existent or trivial and hypothetical at best. This is resulting in a trial-and-error effort on most issues;
Dedicated industry standards and business processes are in the making;
Competition is tough: Competitor insurance companies have a promising history and a proven track record to continue to demand loyalty from existing customers while attracting the prospective;
It is imperative for any Takaful operator to convert challenges and grim realities into fulfilled opportunities. Getting the basics right and simplifying the complex and the sophisticated is the best way forward. This will require drastic changes in the way operators work than the work itself and this is primarily due to the involvement of Shariah at such a core level of the system.
Few critical success factors for Takaful operators to consider
Treat Shariah compliance as an end-to-end process
This means that Takaful operators must remain Shariah compliant at all times. One must realize that the Islamic finance industry as a whole has invoked high expectations from Muslims largely due to Shariah-related sensitivities. Shariah non-compliance therefore is a real risk which can lead to severe consequences. A case in point is Sukuk: In late 2007, a leading Shariah Scholar proclaimed that 85% of the Sukuk are raised with a buy-back (Bai-Inah) clause and hence are not compliant to Shariah. Consequently, the issuance of Sukuk in 2008 fell dramatically. Similarly, Shariah non-compliance in investments will result in purification of Shareholder’s income through charity.
Due to this factor, the operators must perform their duties both professionally and ethically and strive to achieve excellence, all the while ensuring that Shariah rulings and values are never compromised.
Takaful operators must clearly define the scope of Shariah compliance. Ideally, it should include and cover most importantly the Takaful model itself, the products, the investments, contract wordings, marketing collateral, surplus sharing and fee structures.
An in-house Internal Audit should also be conducted for the monitoring of all financial activities in the company;
Ensure a continuous screening of investment avenues since some avenues may later become impermissible which would require the operator to discontinue the investment or donate charity accordingly;
The top and lower management should jointly be completely sold to the idea of Takaful and be aligned with their company’s vision. It is vital to consider work as an act of worship to Allah and a service to mankind. This difference in mindset itself will trigger self-accountability at every level which is so vital to maintain Shariah order in the company. Moreover, the Operator must not treat Shariah compliance as a ‘limitation’ or ‘restriction’ and strive to understand and implement the rulings in true spirit.
Develop need-based and innovative Takaful products
One cannot emphasize the point enough that participants must never pay the price for being a Muslim, but for the product. Inferior products which are largely developed through a cut-copy-paste model and lacking features important to customers’ needs will neither contribute towards the industry’s growth nor add to operator’s profitability.
It is customary for the majority of Islamic Finance institutions to sell their products in the name of Shariah. To consider Shariah compliance as a company’s unique selling point (USP) is a crime and only goes to show that attention to product and customer service is lacking.
On the contrary, Takaful products must be need-based, innovative, and most importantly, should make financial sense to the customer. The customer must feel a part of a noble cause. As such, appeal to them through the quality of benefits on offer and the service to be provided. Shariah compliance, though an integral part of operations, should be treated as a value-added feature when it comes to the products’ marketing and sales efforts.
Product pricing should be competitive
A product which is highly priced is a no-winner. In a crowded industry such as insurance where competition is fierce, Takaful needs to match, if not surpass, conventional insurance in terms of product benefits and pricing. It is important for both the Shareholder and the participant to receive optimum returns on their investment. There is only one way of achieving this goal: reduce the cost of transaction.
Employ state-of-the-art technology to help streamline operational processes thereby improving its effectiveness;
Implement total quality management tools such as Six Sigma to eliminate wastage and inefficiency;
Hire quality human resource based on their character and competency and equip them with technology and other management tools. A skilled human resource that is committed with and passionate to the cause of Takaful will subconsciously eliminate wastage and redundancies at their end thereby reducing the overall cost of transaction. Talent and technology will help bring creativity and innovation in the industry;
Provide quality customer services
Takaful operators must not think about satisfying customers by merely meeting their expectations. Instead, delight them by exceeding their expectations. Give them enhanced benefits but do not be discriminating.
Offer need-based and quality products;
Ensure complete transparency and full disclosure of all product benefits and exclusions;
Give Khiyar or Options to customers for free review of product. The customer must be given the option to change his mind even after signing up for a Takaful Plan;
g. Takaful consultants should be rigorously trained. It is their responsibility to ensure that the customer first fully understands his/her need or risk and the product he/she is buying to fulfill that need or to mitigate that risk. Make follow-up calls and interview them over their understanding once the policy has been sold;
Improvise on the distribution channel
It is a well-known fact that an insurance policy is one of the most complex financial products which requires a push selling technique to sell it. This is the reason why agent-based structure continues to be the backbone of any insurance/Takaful company. Over the years, however, companies have improvised, introduced, and established Banks as the second most profitable distribution channel.
Takaful operators can create a difference by penetrating into new market segments such as different ethnic groups and more. Community marketing and e-market can also be effective distribution channels.
There is sense in proclaiming that Takaful can become an engine for economic growth and development for many of Muslim countries. It is vital for both regulators and Operators to cooperate and contribute towards the industry’s success.