Introduction
As the global financial landscape has seen some turbulence last year, it is only pertinent to wonder whether the Takaful industry has gone through the same motions as the conventional insurance sector. Paradoxically, as the financial sector worldwide has known unprecedented turmoil with the global crisis, Takaful has gone through a distinct phase of internationalization. For such a nascent industry, it has shown no signs of abating and quite a strong resilience demonstrated by a net contributions growth of 18% for Malaysia and gross premium growth of 28% for Saudi Arabia in 2008, a stark contrast with the conventional sector (with an average of 2.5%). The World Takaful Report, released by Ernst & Young in April 2009, mentions that contributions are expected to rise to more than US$4.3 billion this year.
GCC and Southeast Asia strongholds of Islamic insurance
The Gulf Cooperation Council remains one of the strongholds for Takaful, with the region’s total volume reaching over US$2 billion in 2007, more than half of the global Takaful production for that year, which stood at US$3.3 billion.
In the GCC, Saudi Arabia is a flagship market for Takaful and has witnessed strong growth in 2008. Gross written premiums reached SAR10.9 billion (US$2.9 billion), up from SAR8.6 billion (US$2.29 billion) in 2007, representing an increase of 27%, compared to 24% in 2007. Fifty one percent of those premiums generated stem from general insurance [growth of 6.3% to SAR5.5 billion (US$1.46 billion) in 2008 compared to SAR5.2 billion (US$1.38 billion in 2007], 44% comes from health insurance [growth of 57% to SAR4.8 billion (US$1.27 billion) in 2008 compared to SAR3.1 billion (US$826 million in 2007] and the rest comes from Life Takaful.
The performance of the Saudi insurance industry in 2008 continued to be driven by the expansion of compulsory insurance lines, in particular health insurance. The level of insurance penetration was 0.61% in 2007 and increased to 0.62% in 2008, which was mainly due to the large increase in the country’s GDP in 2008. The insurance density also increased from SAR358 (US$95.45) in 2007 to SAR440 (US$117.32) in 2008, which represents an increase of 23%.
However, the penetration and density of Protection and Savings insurance (or Life Takaful) remain particularly low in absolute terms, and relative to General and Health insurance, at 0.03% and SAR24 (US$6.39) per Capita.
In Southeast Asia, Malaysia holds the strongest position in terms of Takaful contributions volume, which stood at US$797 million in 2007. Indeed, the country is a glowing example of how Takaful is part of the financial awareness of customers: Some banks report a share of non-Muslim Takaful customers of over 50% and in some cases, over 70%, a sign of the successful integration of Takaful in Malaysia. In Indonesia, where only Islamic windows currently operate, the growth of Islamic finance is a bit more timid but the signs are unmistakable: According to the data issued by the Indonesian central bank, the asset of national Islamic banks stood at IDR47.18 trillion (about US$47 billion) by the end of 2008. However, to truly flourish, the Indonesian government passed a law, due to come into force in April 2010, which levies some of the tax burden on Islamic investments — a move that has been well received by investors and which demonstrates the government’s will to place conventional and Islamic finance on an equal footing.
Pakistan, the sleeping giant
According to a Moody’s report on Pakistan issued in December 2008, one of the potential areas of growth for the financial sector is Bancassurance – insurance sold via banks. Today, Pakistan is hot on the trail of the GCC, where banks increasingly find that by widening their product offering — including insurance —they can meet the constantly evolving financial needs of their customers. Currently, in Pakistan, the sector is bank-dominated whereas insurance is under-developed —the penetration rate is around 0.8% of the country’s GDP (0.3% for Life Insurance), demonstrating that long-term financial planning and Takaful awareness is still very low amongst the population, hence its huge potential. Pak-Qatar Family Takaful, one of the country’s five Takaful operators, and FWU Group have understood the growth prospects of the country and have entered into distribution agreements with five local banks (Standard Chartered Bank, DIB, Emirates Global Islamic Bank, Muslim Commercial Bank (MCB Bank) and Bank Alfalah). In order to support the introduction of Takaful, The Securities and Exchange Commission of Pakistan (SECP) had released Takaful Rules back in 2005 in order to provide the appropriate framework for companies who wished to get involved. In January 2010, new guidelines for Life Takaful was been issued to bring necessary disclosures regarding benefits, charges and terms and conditions. This set of guidelines promotes greater transparency.
Emergence of new Takaful markets
As we have just seen, Takaful has not only grown in its usual strongholds but has also sparked a lot of interest in new markets. From 133 in 2007, the number of Takaful operators has grown to 179 globally within a year. In the UAE, the Dubai Islamic Finance Centre (DIFC) plays an important role in the establishment of Takaful and re-Takaful operators. Companies such as Zurich Insurance Group and Takaful Re have established operations there, enabling them to have a stronghold in the Emirate. Saudi Arabia remains however in the first position with 37 operators and interestingly, on the list of countries hosting Takaful operators, we can notice the increasing presence of secular countries such as France and Turkey.
This can be explained by several factors, such as the diversification of product offering to meet the needs of a significant part of the population and the great potential for revenue generation. As we have seen with Malaysia, the Takaful proposition is not only attractive to Muslims: Its principles based on ethics, profit and risk sharing and on tangible assets, excluding all form of speculation can be a pull for those who have lost faith in the conventional financial industry due to too much speculation, the consequences of which we are now familiar with.
What we have also seen in the past year is an increasing number of joint ventures between local and international financial institutions: Allfunds Bank, one of the major global distribution platforms of third-party funds in the world, entered into a partnership with Salama, the UAE insurer to widen their fund selection hence optimizing their Takaful offering. Axa, the French insurer, had also entered into a partnership with Salama in order to provide their customers with Group Life products, thereby allowing AXA’s UAE corporate clients to offer a comprehensive Employee Benefits package to their staff. In Bahrain, Legal & General Gulf Takaful, a wholly-owned subsidiary of Legal & General Gulf (a joint venture between UK-based Legal & General Group and Ahli United Bank Group), has just announced it will offer various life Takaful products through Ahli United Bank branches in Bahrain and ultimately the broader GCC region.
Salama has also started to sell general Takaful in Algeria, a sign that Shariah compliant insurance is starting to get hold of some countries in North Africa. Egypt already counts nine Takaful operators among its insurance providers. Egypt has a great potential for Takaful, as the country’s life insurance penetration rate is about 0.4% and its population stands at 75 million. In Turkey, the fundamental attractions of its dynamic economy are manifold: Turkey counts more than 70 million citizens, with an average age of 29, so the potential to sell life insurance, savings and pension products is significant, particularly since the ratio of premiums to capital is currently so low. In 2008, insurance companies issued 37.5 million policies — a 15% increase compared to 2007 (the increase was 13% for Life Insurance) and the total amount of industry assets rose by 19% to TL 27.9 billion (US$19 billion) compared to 2007. In Turkey, the bancassurance channel has increased from 42% to 55% for Life Insurance in the past three years and the expansion of the compulsory products range —- for example, earthquake protection —- has become obligatory for workplaces and households.
Europe
Islamic insurance is becoming attractive as financial centres want to diversify their revenue-generating sources to avoid putting all their eggs in one basket: at the IFN event in London back in July 2009, former Lord Mayor of London Sir David Lewis said: “London is the world’s leading centre for international insurance, people trust London and the London market, and we should be a very suitable place for Takaful and re-Takaful to prosper”. Those are sentiments that resonate throughout Europe today; especially in Paris where the government, spearheaded by Christine Lagarde, minister of economic affairs, industry and employment, is vocal about rivaling London in the coveted role of leading Islamic financial centre in Europe.
Increasingly too, we see conventional insurance giants tapping into the promising Takaful market: Zurich, the Swiss insurance giant fresh from receiving its license to operate in the DIFC, hopes for a 5-10% share in the corporate insurance market in the Middle East. Allianz, the German one, has received authorization to operate in Qatar and hopes to launch its first Islamic annuity product next year, tapping into a growing number of clients in the Middle East keen to add to their state pensions. As recently as late December 2009, Generali, the Italian insurance giant, announced it was entering into a strategic partnership with Qatar Islamic Bank in order to access the GCC Takaful market, demonstrating again the attraction of the Takaful proposition and the potential of the BancaTakaful model.
If we look closely at this trend, can we safely say that the future for Takaful is globalization and partnership? What would be the other factors that would determine the future success of Shariah compliant insurance?
Innovation is key
It seems that alongside globalization and partnership, innovation is also a part of the mix for Takaful. Noor Takaful, for example, has just launched its online real-time, web-based, Islamic insurance service to allow customers to shop for a variety of insurance products which are offered at very competitive and transparent rates. The service provides a quick and complete insurance solution from beginning to end, from obtaining an online instant quote to purchasing online insurance and delivery of policy cover. Another example is FWU Group, a white label product and process partner of many banks especially in the Middle East, has implemented, in conjunction with an international bank, a dynamic principal protected equity growth strategy for Takaful customers.
The main benefit for the customer is that the new technology secures capital growth at maturity by locking in the highest net asset value (NAV) of the strategy measured on a monthly basis during the complete term of the investment. This product innovation is embedded in FWU Group’s family Takaful investment-linked plans. FWU Group also believes that process innovation is key to customer convenience and has devised a web portal (FWU Internet-based Life Office System – FILOS) to make the process of applying for insurance as easy and convenient as the opening of a current account or the application for a credit card. This type of innovation makes it easier for banks to sell family Takaful products to their customer base. After innovation and the surge in the internationalization of Takaful, the next stage of development would naturally be for Takaful to move from being a niche to a mainstream offering. According to several prominent figures within the industry, there are many ways Takaful could come into its true potential. Ajmal Bhatty, CEO of Takaful Tokyo Marine Middle East, thinks one way of achieving this is facilitating MicroTakaful in large parts of the developing world and allowing for mass exposure of Takaful in countries with a genuine demand for Islamic finance. Dr Abdul Rahman Tolefat, CEO of Allianz Takaful, thinks more highly-rated Sukuk funds should be introduced and governments should allocate a part of their Sukuk issuance to the Takaful industry. Tarmidzi Nordin, CEO of Etiqa Takaful, Malaysia’s largest Takaful company, thinks its successful bancaTakaful model with its parent company Maybank is the key to success and is currently exploring opportunities to implement similar integrated bancaTakaful models with other interested banks.
BancaTakaful indeed provides a win-win solution: The bank receives fees based on their sale of insurance policies and the insurers get access to the bank’s customer base. According to the Middle East Bancassurance conference which was held in 2007, BancaTakaful sales in the Middle East could reach US$100 million by next year. Today, global players such as Barclays, HSBC and Standard Chartered all offer Takaful to their customer base locally. This way, consumers benefit from the level of service expected from a well-known distributor as well as from the level of product expertise provided by the local Takaful operators.
Challenges to overcome
However, there are a few points that need to be raised and addressed to enable the Takaful industry to reach its full potential. One of those points, frequently referred to, is the lack of consistency. There are four main schools of Islamic jurisprudence and even within those; scholars may take different views as to the compliance of an Islamic product. A divergence in views could be considered as strength as it allows innovation when developing Islamic products. However, while not providing a final solution to the issue, the introduction of standards by the Islamic Financial Services Board (IFSB, based in Malaysia) and the offer by The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI based in Bahrain) to act temporarily as the industry watchdog, are steps in the right direction.
Back in December 2009, the IFSB issued some guidance regarding solvency requirements for both the Takaful and the Shareholders’ Funds. AM Best, the ratings agency, issued a bulletin analyzing the new “Exposure Draft (ED) Standard on Solvency Requirements for Takaful (Islamic Insurance) Undertakings” and thought the document provided a good basis for evaluating the capital of Takaful insurers, and therefore is well placed to provide sound guidance to regulators of such companies. According to AM Best analysts, the direction of the ED is likely to assist the future stability of the Takaful industry. The provision that Takaful operators should try to ensure that enough profits are accumulated at the Takaful Fund to ensure its independent solvency is particularly important given that a great proportion of Takaful undertakings are in their start-up phase when profit accumulation is critical.
Another issue appears to be recurrent and it concerns the shortage of skilled personnel and experts in Takaful. Currently, there is a limited supply of Takaful professionals and today, they are estimated at around 2,000 globally. This compares with 150,000 conventional insurance agents and brokers, and some 86,000 insurance staff, agents and brokers in Malaysia alone. It is therefore of paramount importance that the talent pool of trained personnel available to Takaful operators grows as well as the number of non-Muslim insurance personnel who are knowledgeable about Takaful operations. However, to remedy this, an increasing number of universities and professional bodies offer degrees in Islamic finance.
In Europe, for example, CIMA (Chartered Institute of Management Accountants, based in the UK) as well as the Universités de Dauphine and Strasbourg have added Islamic Finance to their curriculum. To raise the awareness of Takaful and to promote full transparency, consumer education is also extremely important. To achieve this, Bank Negara Malaysia has launched an initiative called “insuranceinfo” which is basically the Consumer Education Programme (CEP) on insurance and Takaful. A joint effort between the banks, the insurance and the Takaful industry, the programme is designed to provide educational information to enable consumers to make well-informed decisions when purchasing. It aspires for consumers to be in a better position to select insurance or Takaful products that best meet their needs as well as to understand their rights and responsibilities as consumers of insurance or Takaful products and services.
Another issue has been highlighted in an interview published by Clyde & Co: The shortage of re-Takaful providers. The analysis reveals that as a direct consequence of the shortage, it has been necessary for Takaful operators to use conventional reinsurance in order to spread risk, reduce the impact of claims volatility and to increase capacity. To date the use of conventional reinsurance by Takaful operators has been justified by Shariah scholars on the basis of the so called “doctrine of necessity”. However, as capacity in the re-Takaful market increases, particularly with some of the major reinsurers entering the market, such as Swiss Re, Munich Re and Hannover Re in support of the existing dedicated re-Takaful operators, such as Takaful Re, it is likely that Shariah scholars will reassess their position in the coming years.
A fourth issue to affect the Takaful industry is the limited choice of Shariah compliant investment options currently available for Takaful operators. Currently, only Malaysia’s legislation regulates Takaful operators separately from conventional insurers. Takaful operators in other countries must conform to investment restrictions in order to respect Islamic values i.e. investing in interest-based securities such as conventional bonds are totally prohibited.
Prudent risk management would dictate that a Takaful operator diversify its portfolio in secure, liquid and long term instruments — which are rare in Islamic finance offerings. Islamic bankers have yet to develop a Shariah compliant money-market fund that is sanctioned by a central bank. Although these are under development presently in Bahrain and Malaysia, it is of utmost importance that leasing funds as bond substitutes, REITS and other securitizable assets are created and then publicly traded to broaden the investment options for Takaful operators and to assist them to overcome competitive disadvantage where conventional insurers gain interest returns on “idle” and short-term funds.
In Muslim-majority countries, government and insurance regulatory bodies could elect to follow the example of Malaysia and authorize a special legislation for Takaful companies. Such an act would balance Shariah guidance with secular laws generally geared to assure to solvency of insurers and to protect consumers. In addition, the act would address the critical issue of the rating methodology for Takaful operators which will require them to adopt transparent operations and standardize their accounting claim-paying and reserves practices. At the moment, it is difficult to see how Takaful operators can be rated internationally with a modest capital structure and the absence of internationally-rated Islamic securities.
In conclusion, Islamic insurance is based on ethical principles: Cooperative risk protection methods that promote economic self-development which generate many benefits for its participants. In as much as the Takaful system revolves around active participation by members of the community, there are conditions that need to be met if the Takaful industry is to realize the growth forecast by so many industry experts. According to the Alpen Capital report, the ideal solution would be mergers and acquisitions: That way, Takaful operators would not see their profit margins decrease. Some Takaful operators in the GCC and Asia have already chosen to combine forces with large international players by creating joint-ventures with them. For Takaful to truly flourish, it seems that partnership in the sector is essential to achieve economies of scale as well as to enable the cross-border distribution of Takaful. Then and only then, will the industry become truly international and consequently, take the place it deserves in the global insurance industry.
Partner
FWU Group