Having entered the first half of 2008, indications as to the growth prospects of Takaful (Islamic insurance) have been mixed. A debate at the General Arab Insurance Federation (GAIF) hosted by the Bahrain Insurance Association in February was surprisingly downbeat about Takaful’s track record to date.
The CEO for the Middle East and African region of a premier global reinsurance company expressed disappointment with the growth of the Takaful market. The former CEO of a major regional reinsurance company, with hindsight, questioned the timing of their launch of a retakaful company.
That seems to be a curiously short-term perspective, because as Fitch noted in a report published last year, a number of challenges stand in the way of market development in the coming years — including the education of the client base, access to suitable investments, recruitment of staff and the availability of Islamic reinsurance (reTakaful). It is also a perspective that is in marked contrast to the enthusiasm for the sector shown by several other market participants.
At the end of April 2008, for example, Morgan Stanley’s equity research department initiated coverage of the Islamic Arab Insurance Company (Salama) with an “overweight” recommendation. Morgan Stanley’s bullish earnings estimates for Salama are driven largely by the recognition that the insurance industry in the Muslim world — conventional as well as Shariah compliant — is still at an embryonic stage compared with the G7.
Modest penetration
In a special report on the Takaful industry published to coincide with the initiation of its coverage of Salama, Morgan Stanley observes that “life insurance is practically non-existent in most of the potential Takaful markets such as the GCC, North Africa, Far East and Asia. This is highlighted by the low levels of insurance penetration (life premiums as a percentage of GDP), which is typically below 1%”.
Equally positive about the long-term outlook for Takaful is Ernst & Young. It recently released an analysis of the market which advises that an estimated 133 Takaful operators are now active worldwide, almost half of which (59) are located in the GCC, with a further 22 in the Far East and 21 in Africa (mainly in Sudan).
“With estimated total Takaful premiums in 2006 of US$2 billion (against global insurance premiums of US$3.7 trillion), it is clear that there are significant opportunities for Takaful in the years ahead,” this report noted. “High levels of liquidity in its natural market should encourage Takaful to raise its global profile.”
E&Y calculates that the global Takaful market (excluding Iran) has been expanding since 2004 at a compound annual growth rate (CAGR) of 20.4%, and if that growth rate is sustained in the coming year, global gross contributions will reach US$4.3 billion by 2010.
There are several explanations for the historically modest level of penetration of insurance in the Islamic world. Perhaps the most prominent of these has been the perception that insurance is essentially proscribed in Islam, as providing protection against future events appears to involve maysir (speculation) and gharar (uncertainty).
In addition, the investment of premiums in the conventional market in instruments that generate income in interest-paying instruments and/or the shares of companies in prohibited industries was also seen as a bar to the evolution of Shariah compliant insurance.
GCC an attractive wealth market
The reasons for the failure of the insurance industry to make significant inroads in Muslim-majority countries are becoming progressively less compelling, for at least three reasons.
First, Islamic scholars are increasingly recognizing that the mechanics of Takaful, which are underpinned by the sharing of profits and losses between insurer and insured, need not violate Quranic teachings. That view has been gathering growing acceptance since the formal approval of the Takaful system by the Fiqh Council of the Organization for the Islamic Conference (OIC) in 1985.
Second, a growing number of Islamic countries are introducing or planning new legislation designed to support the growth of their local insurance industries and, in some cases, to make insurance compulsory.
Third, buoyant economies throughout the Islamic world, directly or indirectly underpinned in many instances by soaring oil prices, have led to a dramatic increase in disposable personal income levels.
“The Islamic asset management market presents an important opportunity and is centred on the Gulf Cooperation Council,” McKinsey & Co advises in its World Islamic Banking Competitiveness Report 2007/08. It is easy enough to see why. Buttressed by high oil prices and a surge in real estate markets throughout the region, disposable income levels in the GCC are at an all-time high. Nor are there any indications that the rise is likely to decelerate in the foreseeable future.
The most recent edition of the Capgemini/Merrill Lynch World Wealth Report, for example, forecasts that the assets of Middle East-based high net worth individuals (HNWIs) will grow faster than those in any other part of the world over the coming few years.
The 2007 report predicts an annual growth rate of HNWIs in the Middle East of 9.5% between 2006 and 2011, which would see the value of their assets expand from US$1.4 trillion to US$2.2 trillion. By contrast, the projected annual global growth rate is a more modest 6.8%, and even in the economically vibrant Asia Pacific, it is 8.5%.
An alternative measure of the relative wealth of individuals in the GCC is featured in another analysis of global wealth, published by Boston Consulting Group (BCG). The most recent BCG report finds that the average assets under management of wealthy households in the GCC were close to US$1 million in 2006, compared with the global average of less than US$400,000.
It is no surprise, therefore, that BCG describes the GCC as an “attractive wealth market”, or that its report should observe that “nearly all international players are currently working to establish representative offices or a more substantial presence in the GCC region”. That has engendered heightened financial literacy among Muslims throughout the world, which in turn has led to burgeoning demand for a broader range of savings products.
As Morgan Stanley observes in its analysis, in Western economies, “increasing wealth and asset accumulation drive the desire to protect possessions” in Islamic societies. As a consequence, for wealth management firms that are concentrating so much of their marketing on the Shariah compliant market, Takaful-based savings products should be an anchor product.
The fast-expanding international FWU group is a pioneer of “white labeled” Takaful based savings, education and retirement plans and has expanded its bancaTakaful investment linked offerings to include Shariah compliant annuity plans and home finance Takaful-based investment linked plans.
For those with confidence in the long-term prospects of the Takaful market and of the role that Takaful should play in a broader wealth management franchise, the precedent that has been set over the last decade in Malaysia is a powerful blueprint for others to follow. In its report, for instance, Morgan Stanley says that Malaysia should be regarded as a “reference point” for the industry.
Malaysian innovativeness and initiatives
In 2008, Malaysia continues to be a trailblazer in the Takaful market. It has also demonstrated leadership qualities by developing products that are helping to globalize the market for Islamic financial services.
In March, for example, the Kuala Lumpur-based Hong Leong Tokio Marine Takaful (HLTM Takaful) became the first operator in the sector to launch a fully Shariah compliant Takaful plan linked to investment opportunities in the Middle East. Structured by Citibank, this capital protection investment-linked product is known as the HLTMT Gulf Opportunities Plan (GOP) and uses the concepts of Wa’ad and commodity Murabahah as a means of delivering Shariah compliant returns to policyholders. In the event of death, the plan pays 125% of the initial investment amount, with initial investments starting as low as RM10,000 (US$3,064), although bonus units are allocated to investors subscribing for at least RM50,000 (US$15,329).
The product is, therefore, a good example of an innovative scheme that combines the protection offered by conventional insurance with the investment returns that leading wealth managers offer their clients. According to a Citibank briefing, GOP is a three-year Takaful product providing investment returns benchmarked against the performance of Middle Eastern equities, commodities and currencies “where the projected annualized return at maturity could be up to 10%”. It adds that “understanding the volatility of today’s market, the GOP’s investment is based on the ‘best-of-profile’ structure that allows investors to enjoy the highest return allocation from the underlying investment profiles”.
Another initiative to have emerged recently from the Malaysian Takaful sector, and which again blends elements of conventional insurance with those of wealth management, is an education savings product from CIMB Wealth Advisors.
The 3 in 1 Education Plan, developed in collaboration with CIMB Aviva, CIMB Trustee and CIMB-Principal Asset Management, is marketed as a product that “combines unit trust investment, insurance and Takaful coverage and trust nomination services in a complete solution to enable parents to plan for their children’s education”. Innovative growth of Takaful solutions has not, however, been confined to Muslim-majority countries in recent years.
In the UK, for example, an important building block was laid down at the start of May when its first independent Islamic insurance company, Principle Insurance, was granted authorization by the Financial Services Authority.
Principle will be offering Takaful-based motor and home coverage to Britain’s estimated two million Muslims who had previously been unable to purchase insurance policies that are compatible with their religious beliefs.
Clearly, penetration and global acceptance of Takaful are going to be an evolutionary rather than a revolutionary process.
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. References are available on request from the writer.