Takaful highlights in 2009
Last year was an exciting one for the Takaful industry. Many major developments took place during the year, such as the entry of new players, regulations and tie-ups. Malaysia and the Gulf Cooperation Council (GCC) countries continued to lead the market in shaping up the industry to be more competitive. Their continuous support is evident through various initiatives which include policies, liberalization moves and the establishment of facilities.
The industry also received much interest from non-Muslim countries and other giant international insurance companies. This signifies a high level of confidence in the industry’s potential. The prominence enjoyed by the Takaful industry in the financial world has much to do with the growth of Islamic finance.
Initiatives
One of the major developments for the Takaful industry in 2009 was the initiatives taken by the Islamic Financial Services Board (IFSB). The IFSB and the International Association of Insurance Supervisors (IAIS) made an agreement to enhance cooperation and understanding in mutual areas of supervision in the industry.
Bank Negara Malaysia also introduced guidelines on the Takaful Operational Framework. The guideline serves as guidance for Takaful operators in conducting their operations. It also promotes operational efficiency and best practices that would safeguard the interests of stakeholders and participants.
New entrants
Last year also saw more companies entering the industry. Among the new entrants are T’azur and Allianz Takaful that were granted licenses by the Qatar Financial Centre Regulatory Authority (QFCRA), Syrian Islamic Company for Takaful, a Syrian-Qatari joint venture and Noor Takaful Insurance Company-Kuwait (NTIC) which was launched with a capital of US$30 million. Saudi Arabia’s Riyad Bank has received approval to set up the International Takaful Insurance Company. On the re-Takaful front, Swiss Re received a composite license from BNM to offer family and general re-Takaful solutions to Takaful operators worldwide.
Interested parties
The liberalization move which was announced by prime minister Najib Razak in 2009 prompted a few companies to apply for the family Takaful license. Other developments includes the interest from Italy, a non-Muslim country, as Italian insurance giant Generali is considering a possible Takaful joint venture with the Qatar Islamic Bank (QIB).
Product development
Last year also saw more Takaful products being developed by industry players. They have become more innovative and creative in developing products to remain competitive. Prudential BSN Takaful (PruBSN) for example has introduced its latest medical plan; Takaful Health, with an annual no claim bonus (NCB) touted as the first of its kind in Malaysia. Bahrain-based T’azur has launched what it believes is the world’s first Shariah compliant charitable insurance product.
Those intending to contribute to charities may benefit from the Sadaqah product through regular donations which would be invested in Shariah compliant funds over a set number of years, after which the accumulated capital would be passed to a charity of the donor’s choice. The year 2009 also witnessed the launch of Takaful home cover for Muslims in Britain by Salaam Halal insurance.
2010: What to Expect?
What the Takaful industry experienced in 2009 was a remarkable achievement considering the uncertainty in the global economy during that time. The development indicates that interest and confidence in the industry remains intact despite the recent financial turmoil. The industry’s growth in 2009 however may be minimal.
Looking ahead to 2010, the industry is expected to experience a mixed series of developments based on current market conditions and indicators. Unlike other financial services, the growth of the Takaful industry will not only depend on stability in the macroeconomic environment, but will also be affected by changes in the Islamic finance industry. Thus, market players have to understand the trends operating in the global economy and the Islamic finance industry.
Macroeconomic outlook
Global economic recovery during 2009 was uncertain. Thus the fear of an economic relapse remains. Despite the fear of a returning recession, markets continued to ease towards the end of 2009, and are forecasted to remain steady in the first quarter of 2010.
Demand in the second quarter of 2010 however is softened in view of the weaker market outlook. Due to demographic factors, movement in oil prices has a direct relationship with the Islamic finance industry. In general, a decline in oil prices will be translated into weaker purchasing power for GCC consumers.
Industry outlook
Much has been said and written on the future of the Takaful industry, particularly the hype surrounding the total expected Takaful contributions worth US$7.7 billion by 2012 as reported in Ernst & Young World Takaful Report 2009. With such massive potential, it is not surprising to see more interested parties joining the bandwagon. Thus, market players in general can expect these developments to take place in 2010.
Initiatives
Regulators are expected to issue more guidelines to facilitate the growth of the Takaful industry. The joint effort between IFSB and IAIS for example is deemed to be timely in providing a clearer direction for the industry. This year will also see more BancaTakaful products in the market, riding on the accessibility and marketability of the trend as an alternative distribution channel. Due to its important role in the Takaful industry, technology will be updated and enhanced to improve operational efficiency.
New entrants
Market players are anticipating new entrants into the industry, particularly with regards to Post Malaysia’s liberalization announcement. The new entrants will most likely be huge international conventional players who will bring along new technologies, higher standards of service and more innovative products into the market. This will serve to increase competition in the industry. In addition, more tie-ups with interested parties such as untapped markets will take place based on mounting interest and steady growth.
Product development
Market uncertainty in 2010 could potentially influence demand for family and general Takaful products. The flavors of new products depend on factors such as risk appetite and awareness levels. In view of uncertainties in the market, investment-linked products may not appeal to customers.
Instead they may favor annuity products for fear of losing their jobs. Rising awareness on issues like health may see an increase in demand for Hospital & Surgical (H&S) products. Other factors include new entrants in the Family Takaful business which may increase the variance of family products. Based on the above, the expected robust growth of the Takaful industry will be underpinned by underlying factors such as demographic profiles and investment facilities. Nevertheless, other factors such as purchasing power and policy are equally important.
Based on population figures by the Organisation of Islamic Cooperation (OIC) countries, (though some countries do not have a total Muslim population), the growth provides a catalyst for further penetration by Takaful operators. It shows the untapped markets in the countries (deemed to have Muslims as a majority) on top of existing markets like the GCC and Southeast Asia. Other non-Muslim countries with Muslim populations such as Singapore, Australia, the UK and the USA, also serve as untapped markets. In Australia for example, the Muslim population grew by 21% to 340, 397 persons from 2001 to 2006 (Australian Bureau of Statistics).
Note: OECD e.g. North America, Pacific, Europe. DC (Developing Countries) e.g. Malaysia, Middle East. Other Regions e.g. Romania, Serbia
The nature of a Takaful operation requires an operator to invest in Shariah compliant investment mediums to bring in returns and income to companies. Takaful operators however have a limited investment medium given the limited availability of Shariah compliant investment mediums in the market. Hence, any market changes that affect the investment climate have implications on the Takaful industry. The Islamic capital market with 588 funds worth US$27 million was considerably steady in 2009. The end of 2009 however saw a shocking development in the Islamic finance industry, particularly the Sukuk market, with the emergence of the Dubai crisis.
Conclusions
Takaful industry players do not have a crystal ball to predict the outlook for the rest of the year. In the absence of a crystal ball, market players need to understand the trends which operated in 2009 to chart their strategies for 2010. Taking a cue from the developments which took place in 2009, the growing interest in the Takaful industry is evident, most likely due to its massive potential. It has caught the attention of giant conventional players and non-Muslim countries alike that are keen to get a piece of the cake.
Gearing up for 2010, the wish list of market players can be long and exhaustive. As the Takaful industry is responsive towards changes in market conditions, the uncertainty in the global market scenario is the risk the industry has to face. While the state of the market is beyond the control of market players, other initiatives such as harmonization in the context of Shariah views can be done within the market practice. Market players also need to brush-up on their service to deliver excellence in retaining customers.
They can also look forward to the relaxation of regulations on joint-ventures or tie-ups, as well as easier access to untapped markets. Apart from that, issues like greater transparency and solvency should not be left behind. Continuous support from the government and regulators including the Shariah advisory council will certainly accelerate the growth of the Takaful industry and strengthen its footing in the financial market.
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