Contemporary Takaful, spanning a 30-year period, is among the fastest-growing segments of the insurance industry and has generated attention worldwide, going beyond the realms of its niche Muslim community. NIDA KHAN looks at the bigger picture going forward, and the challenges that the industry must overcome in order to achieve its full potential.
The number of Takaful operators worldwide has increased to 200, with four additional companies entering the segment this year compared to 196 the previous year, as the latest figures in the seventh World Islamic Insurance Directory (WIID) have shown. The GCC region continues to lead the way with 77 operators, followed by Asia with 40. As per the WIID, Islamic insurance contributions, including Iran, grew 24.2% to reach US$17.4 billion at the end of 2011, while Takaful business grew by 18%.
By class, Family and Medical account for almost 39% of Takaful business while Motor comes in the second place with a 37% share. In Southeast Asia, Life and Health account for 80% of the share. Worldwide Family Takaful contributions are expected to reach US$5.6 billion in 2016 from US$2.2 billion in 2011 according to the Global Family Takaful Report. According to a recent Deloitte Takaful report, global Takaful business will reach US$20 billion by 2017.
Investment opportunities
Apart from sound underwriting, Takaful funds have to be strongly supported by other means that ensure their regular streams of income. The investment avenues available to Takaful are limited due to the necessity of Shariah compliance. Deposits can be placed with an Islamic banking institution geared towards a focus on maintaining an adequate level of deposits at all times. Investment can be done in properties, especially commercial ones, as well as the equity market. Further, investment can also be done in the form of syndication with Islamic banking.
The Takaful operator can purchase Islamic Acceptance Bills (IAB) and Shariah compliant Islamic bonds as a part of its investment activity for both the Takaful funds and the shareholders’ fund.
Takaful firms currently invest little abroad. A shift from the safety of local assets to better-yielding instruments abroad could boost their profits while increasing demand for Sukuk from the Gulf. According to Ahmad Rizlan Azman, CEO of Etiqa Takaful, Malaysia’s largest Takaful operator: “We adopt a prudent approach when considering overseas investments and the appetite for Gulf Sukuk is fairly moderate.”
Market potential
In some countries with majority Muslim populations, such as Bangladesh, Egypt, Nigeria and Pakistan, the Takaful market remains to be developed as the insurance penetration lies somewhere below 2% of GDP. The Takaful market is predominantly concentrated in Malaysia and the Middle East. The majority of Takaful operators are in the GCC countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE.
However, Pew Research Center indicates that there are 344 million Muslims in India and Pakistan combined, which is greater than the 317 million population of Muslims in the MENA region.
Individually India is the second-largest market for Muslims in the entire world with a population of 176 million, after Indonesia. India represents the most extraordinary possibilities as a market, with its growth potential setting it on a trajectory to overtake the US and become the second-largest economy in the world by 2050 (on a PPP-adjusted basis). India thus cannot be ignored when formulating a global strategy.
There are approximately 2.87 million Muslims in the UK, 44.1 million in Europe and around 2-7 million in the US. Takaful can be hailed as a compelling business proposition for non-Muslims too in the UK, the rest of Europe and the US with its strong ethical investment policy, significant growth potential and price competitiveness. If the non-Muslims enter the fold of Takaful as customers, the market for Takaful funds then becomes one catering to a customer base of almost 63.2 million in the UK and some 857 million in Europe, using a definition which includes the whole of the transcontinental countries of Russia and Turkey.
Nevertheless the world’s 1.6 billion Muslims represent a potential customer base that no insurer can afford to ignore and the bulk of this population is made up of people under 25 years of age. This young population has started to gain affluence and if this segment of the population is tapped early, then it can serve to be a customer base for 40 years or more if retained. The most promising enticement for Takaful operators is that most of these Muslims are under-insured.
Lack of investment grades
The strict religious adherence that Takaful companies have to deploy in their operations, investments and products inhibits operational flexibility as well as increases corporate governance pressure to devise Shariah compliant products and services. Besides this, they also have to abide by the regulations the conventional insurance companies have to follow. Thus it is no wonder that these issues coupled with its nascent history have rendered a shortage of investment grades in the Takaful industry, which if implemented would make it a certified force to be reckoned with in the insurance world. Some of the reasons for this shortcoming are as follows:
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The operations of the majority of the domestic insurers are limited to the domestic insurance market. This lack of geographical diversification is a major rating constraint on an international rating scale;
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Limited risk awareness is a major rating weakness. Knowledge of the various risks that the company can be exposed to and sufficient strategies to mitigate these risks are but pre-requisites to a highly rated insurer;
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Predominant reliance on re-insurance adds an additional layer of risk to the business model thereby increasing the complexity of the business structure and providing another feature to be reviewed during the rating process;
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Underdeveloped underwriting capabilities also contribute to the high re-insurance levels;
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The company’s investment strategy and its own underwriting profitability also contribute to its financial strength.
The financial strength rating of only a few insurers has been made available to the public and a majority of these ratings fall in the sub-investment rating category. Most of these ratings are in the low or mid-investment grade. An important aspect of investment grades is that they would promote a high level of disclosures and transparency in the institution, and would also serve to improve the corporate governance in the respective Takaful institutions.
Challenges
The rapid growth of this sector also brings with it several more challenges to be encountered, apart from the lack of investment grades, in order to realize the full potential of Takaful.
There is no single source of credible information for the industry, although various attempts have been made to provide the latest authentic information. This is because the markets have no official statistics issued by regulatory authorities. The information provided in this article has been gathered from multiple different sources such as Deloitte, PwC, Ernst & Young, regional publications, Takaful Re etc.
The Family Takaful business predominantly comes from the urban market and the middle income group whereas the Muslim demography commands that the main target market should be rural areas. Therefore one challenge is to develop and enhance microTakaful to cater to the needs of the rural market.
There is a glaring shortage in the available talent pool of trained personnel to act as Takaful operators. Lack of awareness about Takaful and its products as well as the distinction from conventional insurance among Muslims is also a deterrent to the growth of this industry.
Re-Takaful operators are a basic need of this industry and very few strong and credible re-Takaful operators currently exist to split risks. This presents both a challenge as well as an opportunity in the market.
The investment universe of the conventional insurance industry is vast compared to Takaful, and hence Takaful operators need to innovate especially in the areas of asset management, bonds/Sukuk and risk hedging. These are important areas for Takaful, where good asset liability matching is paramount with secure and competitive returns.
There is a lack of standardization in this sector despite the efforts of both AAOIFI and the IFSB. A set of global regulatory standards binding all operators, with certain localizations, is a must.
S&P recently said that: “We see that overall, Takaful fund deficits are increasing, at least in the UAE and Kuwait, thereby eroding capital strength and ultimately weakening the sector’s financial strength. The continuing weak performance of the Takaful insurance sector, particularly in the UAE and Kuwait, cast a shadow over proceedings at the World Takaful Conference held in Dubai earlier this year. As an indicator, we note that no listed UAE Takaful company has accumulated a distributable surplus for Takaful fund members. In the first quarter of 2013, we note that the Takaful fund deficits in the UAE rose by over 70% from the 31st December 2012, and that in 2012, those same companies saw their fund deficits increase by almost 40% from the 31st December 2011.”
Excluding new capital introduced to the sector in 2012, UAE Takaful companies recorded zero growth in shareholder funds whereas in the UAE conventional insurance sector, the total shareholder funds grew by 5% in 2012 without any new capital injections, with a smaller growth in premiums.
According to the report there is a strong need that Takaful “must compete directly with conventional insurance companies that benefit from established economies of scale, have longer service track records and have more established distribution mechanisms to the marketplace”.
Conclusion
The challenges that this industry is facing are many but with the masses and the youth becoming more aware of the essential concepts of financial planning and protection through the deployment of rigorous marketing strategies, continued positive growth can be a realizable goal.
Takaful firms need to chalk out a plan to overcome their limitations and foster growth and productivity through better risk management strategies, operational and business excellence, grooming latent human talent, reviewing business structures to sift through possible impediments to growth, and finally to lay out the strategic vision and objectives of the firm to facilitate a more scientific approach to pave the way for success through their business acumen.
Nida Khan is the head of Women’s Wing at Amanah International School of Islamic Economics, AISIE. She can be contacted at
[email protected]
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