By Alex Delmar Morgan
Will Takaful or Islamic insurance ever catch on in the West, and are its Gulf prospects truly long-term?
Takaful is the great success story of this region's insurance industry, but will it ever catch on in the West, and are its Gulf prospects truly long-term?
From Manama to Malaysia, takaful, or Islamic insurance, is on the rise.While still a relatively immature industry, takaful is looking to ride on the back of the explosive growth of Islamic finance in the Arab world, and increase its share in the global insurance market.
Global accountancy firm Ernst & Young predict that the international takaful market could be worth $7.7bn by 2012, up from a mere $1.4bn in 2004. Last October, the world's second largest reinsurer Swiss Re said in a report that takaful grew 25 percent a year from 2004 to 2007, while the conventional insurance market posted low double digit growth at 10 percent in the same period.
Half of the market will go Takaful. It could be as high as that; up to 50 percent in five years.
Like all Islamic financial products, takaful has to adhere to the strict principles of Sharia law. Income derived from interest is forbidden, along with revenue derived from prohibited activities or trade such as gambling, pornography, and alcohol. Takaful in Arabic means joint guarantee and it works on the basis that a group of people agree to share risk by putting money into investment funds, sometimes through a charitable donation, and then draw on these funds when there is damage or loss to a party.
"There is tremendous opportunity because it [insurance] is very underserved - insurance as a whole is very underpenetrated [in the Gulf], says Dinesh Chandiramani, director of distribution in equity and credit sales at Dubai-based investment bank Arqaam Capital.
"People are looking at decent growth for the sector of around 15 to 20 percent on an annualised basis because there is a nascent market right now which is in the process of being built up. It could grow significantly beyond that if the product is well-received and people start to buy into it," he continues.
Nick Frei, chief executive of Bahraini Islamic insurer t'azur predicts that takaful could have a 50 percent market share in the Gulf's insurance sector by 2014.
"I firmly believe half of the market will go takaful. It could be as high as that; up to 50 percent in five years" says Frei.
But the rise of takaful has not been plane sailing. It still only makes up a fraction of the global insurance market and the sector's growth has been hamstrung by a dearth of takaful reinsurers. Some are emerging, such as the Dubai-based Takaful Re, but generally there are too few companies to underwrite the risks of the smaller takaful players.
Therefore, many takaful companies go down the conventional route when it comes to reinsurance, and because of the lack of options available to the industry, it usually comes with Sharia scholars' approval.
Currently, Malaysia, the world largest Islamic financial centre, is the market leader in takaful. It is home to some of the biggest Islamic operators in the world such as Takaful Malaysia, which aims to capture over half of the market share of the industry in under three years-despite the economic gloom. In comments made by the group's managing director Datuk Hassan earlier in the month, the industry is worth RM12bn ($3.65bn), with his company's current share at $1.13bn.
In conventional insurance, risk is sold at a price depending on age, background and financial status, introducing a largely commercial aspect. In takaful, transactions that are deemed to be uncertain are banned.For example, a Western insurance broker will sell risk, such as home insurance, not knowing whether there will be claim on the house.
In the West, insurance companies may invest in ventures which make their money from interest or in sectors that are forbidden by Islam.While takaful remains most prominent in South-East Asia, the GCC's potential is huge, experts say. Along with an increased appetite for Sharia-compliant financial products, the Gulf has an extremely low insurance penetration rate, according to Swiss Re's latest sigma study.
The global average insurance penetration rate as a percentage of GDP, the report found, was 7.5 percent in 2007, with GCC's between 0.5 percent and 2 percent.
Frei at t'azur says people have in the past been ‘unfamiliar' with the concept of insurance, but attitudes, especially among GCC nationals, are changing.
"Clearly as GDP per head increases, the aspirations of people change as well. If you are making $10,000 a year, you don't bother about insurance," points out Frei.
"Once your income is up to $40,000 [a year] your aspirations change and you worry about education, financing a house and planning for retirement - that's usually what kick-starts insurance spend in other countries. This is what has happened in the Gulf as revenues from oil trickle down and society becomes wealthier."
And low penetration rates have much to do with the region being relatively natural disaster free, experts say.
"Penetration [rates] for housing insurance has been fairly low in this part of the world. The risk for housing disaster related activities has been low," says Chandiramani at Arqaam.
"Burglaries and break-ins have virtually been non-existent over here and fires don't take place in residential real estate anywhere near as much as other parts of the world. That has resulted in people not seeing the need for housing insurance," he adds.
The booming housing market in the Gulf is potentially one of the biggest catalysts for its embryonic insurance sector. Demand for affordable housing is high - Saudi alone needs 1m new homes by 2014 to meet the needs of its large, young population.
"Places like Saudi Arabia would be one of those large markets that would present a huge potential demand," says Chandiramani.
He explains that takaful is now being marketed more aggressively in the GCC, with some banks even requiring proof of home insurance and personal life insurance before providing financing on a property.
Governments moving into takafal on big infrastructure could spur sharp growth in Islamic insurance, says Frei. Last summer, Bahrain and Qatar launched a joint venture Islamic insurance firm (The Al Jasir Takaful Insurance Co) with paid up capital of $70m to focus on real estate and cars crossing the proposed Qatar-Bahrain causeway.
"These big projects, given their complex nature in the past, have ended up at Lloyds or other international markets. On the reinsurance side that still may be the case but more and more of the premium will be retained in the region as takaful capacity grows," says Frei.
In line with the soaring popularity of Islamic finance, the outlook for Islamic insurance is rosy, industry figures agree.
"The vast majority of the population here is traditional and for them Western style insurance is a no go. That explains the below par penetration [rate] in region - Takaful is going to change that dramatically," Frei points out.