There has been an explosion in the number of Takaful start-ups in recent years and this has led to considerable confusion regarding which models each operator follows and the benefits or issues that each model can generate: particularly with regard to the practical implementation of these Takaful models in day to day business operations. This divergence has created considerable uncertainty within the industry.
operators are in a process of experimentation, looking at various models and investment strategies within their operations to see what works for them. The Takaful
industry is standing at a crossroads; one in which regional success is being highlighted in the context of global ambition. The entrance of the large multinational banking and insurance operators is central to this. However, the ultimate appeal of Takaful
in this post-credit crisis situation has not been fully capitalized on.
Numerous multinational insurance companies have embraced the concept of Takaful and as such they have created some degree of convergence within the industry. This has meant that Takaful operators have to be greatly aware in terms of optimizing their investment strategies and reducing insolvency requirements. Investment issues are currently one of the largest issues facing the Takaful industry, as currently the industry – even in developed market nations such as Malaysia – does not have the same depth that the conventional industry enjoys with regard to investment.
As a nature of the business, Takaful and Islamic finance as a whole seeks to create a level playing field for itself. However, this level playing field means that investment income has become more critical than ever with regards to business survival. Investment returns are therefore key and pricing has become increasingly critical, especially in a tariff-free environment where large insurance companies dominate.
According to Hassan Scott Odierno, a partner at Actuarial Partners Consulting
, life is different in Takaful
. In the west you set your assets to match your liabilities (credit, duration, equity etc.) However, often in Takaful
we have self imposed limitations. Hassan proposes that Takaful
operators must flip the situation over, looking at their assets and matching their liabilities accordingly. This way you are not replicating what is on offer in the conventional industry and as a result you are not taking on excessive risk due to your liabilities.
Hassan continues by adding that the lack of empirical data is a critical aspect of this. This has meant that on many of these issues the industry has had to either theorize or utilize data from conventional operations. He concludes that ultimately, the issue comes down to: “What is the Takaful
operator’s unique selling proposition and what value can you add?” Takaful
can benefit by offering straightforward simple products and dispensing with much of the insurance jargon, thus opening up transparency and shared benefits to participants, and raising consumer awareness across all markets.
Without critical mass is impossible to attain success. The insurance industry is dependent on the law of large numbers. Actuarial and historical data is also critical in this aspect, identifying underlying trends and allowing for the mitigation of risk. Compulsory insurance may be a critical aspect in attaining these numbers.
Many Muslim nations are still facing a situation whereby basic needs of food and shelter still take priority and this will only be resolved as these nations prosper. However, the importance of instigating grass roots understanding should not be underestimated, be it through education or the introduction of micro-Takaful products. Shariah scholar professor Dr Syed Othman Alhabshi says that this has distorted the view of Takaful, however, as just because a country has a large number of Muslims does not mean that it can sustain a thriving Takaful sector. — SW