The Takaful industry grew at a dizzying pace in the last 10 to 15 years but the last five years or so have seen it slowing down. There have been some stories of success but several others have been trying their best but not quite getting there. Learning from past experiences, CEOs and the boards of these companies must position themselves for the next phase in supporting the development of the Halal industry and benefiting from its success to become strong and rated Takaful providers. AJMAL BHATTY takes a quick look at the current status of the industry, and what the future holds provided some of the roadblocks that exist in the industry are taken care of.
Takaful providers need to think differently from the ways of the last 10 years, equip themselves with cutting-edge technology of social media to reach out to customers more effectively and build the overall brand of Takaful.
It will not be an understatement to say that the insurance industry (and Takaful) in the Middle East needs rationalization to move forward. The markets are fragmented with too many players chasing a finite number of customers. The irony of it is that Takaful has not managed to create new segments. This has resulted in weaker structures with capital overly exposed to inadequacies of pricing and reserving affecting both Takaful and conventional companies.
Malaysia has done comparatively better in developing Family Takaful, while Indonesia and Pakistan are biding their time in allowing market realities of ‘real’ demand for Takaful to boost growth through windows of established players rather than through independent but new and ‘yet to stabilize’ Takaful companies.
Africa is now getting into Takaful more actively since the last five years, and looks toward established Takaful players and Takaful consultants in other markets to help them set up start-ups and seek advice for existing operations to function more efficiently. Sudan, of course, is an exception that has been in Takaful from the very beginning.
Europe, which has a much better appetite for anything ethical, has been in the start-stop mode for several years for Shariah compliant ethical offerings. The reason for the one-and-only Takaful company to go down in the UK in 2009 after only one year of operations had nothing to do with the demand for Takaful but rather about the strategy to enter the market with the most capital-intensive product: motor. Not much has happened in North America in Takaful, but Islamic finance in its various forms has grown there at a wholesale level.
The re-Takaful companies have had a similarly mixed pattern of success and sluggish existence. Not enough was done by these companies to handhold the direct companies in various processes and aspects of risk management, primarily because these entities were also new and were going through their own stabilizing phase.
Looking forward, Europe is likely to see Takaful structures and products in the coming years, and Turkey in particular is a market to watch. The Islamic Insurance Association of London is a welcome addition to the global Takaful industry and is likely to be actively involved in helping to find Takaful solutions in the UK and elsewhere. The lead taken by the UAE and Dubai in becoming a global hub for Islamic economy adds a tremendous weight to Halal initiatives around the world.
With so much to handle by the Takaful industry as part of their growing pains, very little happened in microTakaful, certainly nothing on the scale where microinsurance serves some 263 million people. It is incumbent upon institutions like the IDB and state bodies to encourage the development of microTakaful in serving the segment of society that longs to be financially independent.
Looking at its evolution, it has only been around 38 years since Takaful made its mark in the global insurance space, the latter starting on a commercial footing around 380 years before Takaful. The intrinsic need for financial protection, however, has been there ever since trade and entrepreneurship took roots in the pursuit of maintaining the social wellbeing of society and economy, dating back to the days of Hammurabi in written records some 3,800 years ago, and possibly before that.
So within a space of 38 years, a new system (of Takaful) got established with 224 Takaful companies globally as of 2012, writing an estimated US$12 billion of premiums by 2013. This is expected to reach US$25.5 million by 2020. Takaful has grown in double digits ever since, albeit from a small base. However, Takaful is yet to make sufficient inroads, especially in Family Takaful in segments that are severely underpenetrated so far. Takaful has not yet grown at levels to keep pace with the growth in Islamic banking and finance which has assets of US$2.1 trillion as of 2014 and projected to grow to US$3.4 trillion by 2018. The game changers for Islamic finance and Takaful in the coming years are various initiatives to develop Halal industry in all areas of the economy.
Preview of 2016
The Takaful industry has been going through a lot of introspection and quite rightly as the potential for growth remains very high and yet unrealized. (global Takaful premiums of US$25.5 million in 2020 with Takaful assets of double this amount if Family Takaful picks up). The success lies in fixing a range of areas, the biggest of all being the one that was the very reason why Islamic finance and Takaful came into being: it is a system and not a product. And that the ethical impact of this system must be understood and positively impact the daily lives of people, businesses and investors.
In order for the system to work within another conventional and established system, there needs to be a more concerted effort among its proponents to help it get entrenched in the market. Starting from markets where the majority of people would prefer Shariah compliant products (Muslim-majority countries), the policymakers in these markets need to consider making all types of insurance to be Shariah compliant. That would bring a sea of change in conventional reinsurance markets setting up Takaful structures to accommodate the ceded risk. On the contrary, with customers being used to conventional products, there is a general feeling that the Shariah compliant product is simply a label.
What we know of Takaful is a commercial (Tejari) entity with investors expecting profits. Takaful, with its risk-sharing DNA, works best on a purely mutual company basis where there are no external shareholders and the policyholders themselves own the risk funds. But so long as there are external shareholders, the mind-set needs to work around the fact that shareholders and policyholders (participants) are part of the ‘cooperation within society (of the haves and have-nots)’ in helping bring financial solidarity benefiting people, businesses and investors within the parameters of fairness of the ethical system.
We live in an increasingly competitive world where technology, information and globalization are constantly and rapidly creating complex risk structures that trade and entrepreneurship need to be one step ahead of. This creates huge imbalances of wealth in the hands of a few, where greed takes over to drive business profits leveraged by powerful political lobbying such as by the pharmaceutical and tobacco industries and other industries of similar ilk, and which create huge carbon footprints with little regard to the people and the environment, and where debt continues to chain millions into financial shackles they find unable to get out of.
The system of Islamic finance keeps these kinds of imbalances in check, and Takaful is, of course, very much part of this system.