While retail Takaful has developed into a small but successful niche market, commercial Islamic insurance has until now been limited in its scope by a lack of scale and an absence of underwriting capacity. However, a surge in demand from the property and constructions sectors along with some exciting new developments in the market suggest that this could soon be changing — bringing with it a whole new world of potential for the large-scale writing of commercial risk.
Investor influence
Much of this movement is being driven by the frenetic activity across the international property market, as Islamic investors flock to high yield locations such as London and are increasingly demanding insurance options that coincide with their religious beliefs. Last week global risk advisor and insurance broker Willis Group Holdings responded to this with the launch of the UK’s first Shariah compliant commercial real estate insurance offering.
Speaking to Islamic Finance news Adrian Hastie, an account director with Willis Real Estate Practice, confirmed that: “There has been significant activity with the growth of Islamic investment in the UK and Europe from the Middle East and [Asia Pacific], where there is an increasing desire for a fully compliant Shariah solution. We developed the insurance in response to the growing demand from property investors for insurance cover that is compliant with Islamic law. We have already placed business under the policy, with other opportunities currently going through.”
The product was developed specifically to meet existing requirements, suggesting that there is a strong swell of demand. “This latest policy… is intended to respond specifically to the need for Shariah compliance within the commercial real estate sector from an Islamic investor’s perspective,” agreed Hastie.
Underwriting ability
The product is supported by Cobalt Underwriting, one of the first Shariah compliant insurance and reinsurance platforms in the UK. John Dilley, CEO of Willis Group Holdings, commented that: “Hand in hand with the growth in Islamic finance is the demand for Shariah compliant insurance cover, in particular for real estate investors. Access to underwriting capacity, which is compliant with Islamic law for major risks, has not previously been available in the UK.”
Platforms such as Cobalt are aiming to change that, and revolutionize the scope of Islamic insurance provision. Launched early last year, in May 2013 the firm joined forces with global insurance giant XL Group to provide expanded capacity for global Islamic insurance and reinsurance products. “The scope for Shariah insurance is substantial,” said Bishop of the partnership at the time. “Islamic finance is mainly asset-based, so you tend to be looking at types of coverage needed to protect those assets. Naturally, property, construction and related lines of business are a strong fit.”
“We’re initially putting sales capacity behind commercial property, targeting businesses with a turnover of US$50 million or more,” confirmed Jason Harris, CEO of international property and casualty insurance for XL Group, at the 2013 launch. “We believe this is the most appropriate starting point, but this initiative does not start and end with commercial property.”
Willis has already looked beyond its initial Shariah compliant product to new pastures, and Islamic Finance news can reveal that the firm is currently in the process of developing a new Shariah compliant construction policy, which according to Hastie “will offer protection for works and liabilities in connection with developments”.
GCC growth opportunities
The renewed construction boom is one of the most significant new opportunities in Islamic commercial insurance — especially across the Gulf region. A report from Citigroup released last month confirmed that the trend for MENA property has come full circle, with a booming construction sector not only back on track but scaling record heights in the first quarter: with an estimated US$2.5 trillion-worth of projects of which 90% are located in the GCC and 60% accounted for by the UAE and Saudi Arabia alone. US$1.4 trillion-worth of projects are already underway, with the bulk of these in real estate while infrastructure (US$812 billion), oil and gas (US$376 billion) and power and water (US$298 billion) also contribute significant spending proportions. Saudi Arabia is at the head of the pack with US$784 billion in terms of country spend, closely followed by the UAE with US$669 billion, Qatar with US$273 billion and Kuwait with US$249 billion.
This represents a vast expenditure and, inevitably, a concurrently large risk — resulting in a surge in the demand for insurance and reinsurance capacity to cover the upcoming projects. While not all these projects are financed Islamically, a considerable proportion are being developed either by the state or in public-private partnerships of joint ventures with the government or sovereign wealth funds, while many leading GCC property developers (such as Emaar, Dar Al-Arkan and Aldar) have also raised funds with high profile Sukuk issuances. This combination of Islamic investor interests, state involvement and Shariah compliant financing sources has highlighted the dearth of Shariah compliant insurance and underwriting capability, and opened up a new channel of potential in the wider Islamic insurance industry.
Widening the scope
Earlier this year Cobalt proved this by expanding its reach yet further in a second agreement signed in May with Australian insurance giant QBE, enabling it to significantly grow the size of its existing product lines: including an increase in its property risk from US$300 million to US$425 million and its construction risk from US$100 million to US$160 million; as well as a new US$50 million line of casualty capacity.
The opportunities in the market are attracting renewed interest from both local and international players. According to a recent report from global law firm Clyde & Co: “Conditions in the Middle East are now ripe for a slew of transactional activity. With governments making significant infrastructure investments and looking to develop mandatory health insurance, interest from foreign players is considerable.”
Although this has not yet translated into significant deal activity, this is set to take off in 2014 as new legislation from regulators across the region encourages international players to enter the market. “Against the backdrop of the region’s compelling growth prospects, the scene is set for an upturn in M&A activity in the short to medium-term,” confirmed James O’Shea, the Middle East regional head of corporate insurance at Clyde & Co. “The only questions that remain are when and how quickly this will be realized.” — LM