Mutual understanding?

The burgeoning takaful industry still has issues to resolve when it comes to regulation, marketing and Shariah compliance. Daniel Stanton reports from Takaful 08 in Bahrain.
Mutual understanding?
By Daniel Stanton
Sat 03 May 2008 04:00 AM

The burgeoning takaful industry still has issues to resolve when it comes to regulation, marketing and Shariah compliance. Daniel Stanton reports from Takaful 08 in Bahrain.

The takaful industry has come a long way since the first Islamic insurance firm was established in Sudan less than 40 years ago, but in the Gulf some of the foundations still need work before it can progress.

Not only do some regulations need to be tightened, but there are large parts of the economy that are still not utilising takaful products.

Peter Hodgins, senior legal consultant in the Islamic finance group at DLA Piper Middle East, says that completion risk in the construction industry presents a major opportunity for takaful providers, since there are billions of dollars of projects currently underway.

In the UAE, the insurance law is still very skeletal.

"The opportunity here for the takaful industry is enormous, but it's a question of whether it has the capacity and the experience at this stage to underwrite those kinds of risks," says Hodgins.

"I think that will come in time, but there is a clear opportunity."

However, he admits the major driving force behind adoption of takaful products will be individuals. "The driver is always going to be personal lines because from a revenue perspective there is an awful lot of money to be made in that sector," he says.

The inherent attraction of takaful as an ethics-based product is always going to appeal more to individuals than organisations, which may be more profit-driven."

Hodgins believe that takaful providers could be doing more to differentiate themselves from conventional insurance companies, particularly in terms of their ethical positioning.

"There is presently a perception - I'm not saying it's a correct perception - that the insurance companies don't like to pay claims, that you will always meet obstruction, that claims won't be paid in a timely manner," says Hodgins.

Given that there is that perception, takaful operators ought to be trading on the back of it to say, we're different, we are an ethical company, it doesn't matter if you're Muslim or not, the fact is we have ethical standards and when we deal with your claims, you will likewise be dealt with in an ethical way.

One of the biggest challenges for takaful firms is that regulatory and Shariah requirements differ between jurisdictions, making it difficult to come up with products that can be offered internationally.

There are different models of what is acceptable around the world, but we seem to be heading towards a period of standardisation in takaful," says Hodgins.

AAOIFI (the Accounting and Auditing Organisation for Islamic Financial Institutions) has issued a number of standards now, and I think if you live up to them you ensure that you're hitting the most rigorous regimes. So you ought to be able to roll out your product around the world.

The question, he says, is how non-Muslim countries will accommodate Islamic finance within their regulations, but he says that it will not be long before global takaful operations are possible. He points out that multinational insurance firms such as AIG and Hannover Re are entering the takaful market, which they would not do unless they anticipated being able to roll out global products.

On the regulatory side, one part of the problem in the Gulf is that sometimes the necessary regulations do not exist.

"In the UAE, the insurance law is still very skeletal," says Hodgins. "At the moment it's very difficult to advise prospective overseas conventional insurers who are looking to move into the region.

It's very difficult to give clear and definitive advice as to how they would establish themselves and what they would need to do in their day-to-day operations without having to resort to one of the regulators to ask questions of detail."

For instance, takaful and conventional insurance providers operating from the Dubai International Financial Centre (DIFC) are prohibited by federal law from doing direct business in the UAE, although they may offer reinsurance.

They may provide direct insurance to customers in other countries, depending on the laws in those jurisdictions.

However, the Dubai Financial Services Authority (DFSA) is understood to be consulting on proposals which would allow the DIFC's insurance providers to offer life products directly.Until then, there is still ambiguity over the way some of the financial free zone laws interact with federal law, and with Shariah guidance. Hodgins says that many of the frameworks have not been tested yet, since there have been few controversial claims to date.

But there are some jurisdictions that have set the standard for the takaful industry, he says. "Bahrain, for example, has actually come down and said which takaful structures are actually acceptable," says Hodgins.

In the regulations there is express reference to the particular structure. That's the kind of thing that needs to be replicated in some of the other GCC countries.

The standard of policy wording is very low at the moment.

Another issue that could cause problems for the industry if it is not addressed is the content of the contracts. "The standard of policy wording is very low at the moment - it's full of mistakes," says Hodgins.

For example, you'll have two clauses in a policy that do exactly the same thing but in a different way, so they're contradictory.

"Those kinds of elementary mistakes happen just as often in the UK as they do here, but that's an issue.

Insurance and takaful providers often include wording which states that they will not pay if any of the conditions of a contract, however minor, are broken.

"There is no way on earth, in the UK, that kind of drafting would be upheld by a court," says Hodgins. "You have to choose what are genuinely important features of our policy and what are more minor features.

That aspect of the quality of drafting hasn't been challenged yet, but it will be. And if it's challenged on a large claim rather than a small one, that's going to cause someone some pain."

There is a lot of work to be done, by everyone from regulators to takaful providers themselves, but if the industry continues to develop at its current pace, the rewards could be huge.

Challenges and opportunities for the GLOBAL takaful industry — highlights from Takaful 08 in Bahrain.Some of the takaful industry's leading figures were present at Takaful 08, organised by ITP Events & Conferences in association with Arabian Banking & Finance and held in Bahrain.

A common theme from delegates was that Middle East takaful firms were not doing enough to differentiate their products from conventional ones, and were using Shariah compliance as "window dressing".

There was also debate over the procedure for redistributing profits to policyholders. "In the past 10 years, there are maybe two companies [in the Middle East] who paid," said Ayman Al-Ajmi, general manager - Arabian region for AIG Takaful Enaya.

There were also suggestions from delegates that wakala fees were set at a high level so that some firms could avoid redistributing their profits.

Another major issue was the drive to prove Shariah compliance. V.A. Tommy, deputy general manager of Al Rajhi Insurance Company, said: "In Saudi now, the real takaful companies are having a Shariah audit on a continuous basis.

If your Shariah board says you are not selling in accordance with Shariah, that's the worst thing that can happen." Tommy said that takaful providers deemed to have breached Shariah guidelines can expect to lose customers.

Ajmal Bhatty, CEO of takaful and COO of Tokio Marine Middle East, said that there had been incidences when a Shariah board has changed its mind when new, previously undisclosed, information came to light.

Bhatty also told delegates that retakaful providers need a greater range of Shariah compliant investment products. "We have a dearth of investment products," he said. "We have a very limited domain and we compete with conventional companies."

He called for more Shariah compliant structured products to help retakaful providers reduce their reliance on real estate and equity.

Chakib Abouzaid, CEO of Takaful Re, said that his firm had faced challenges when making its first investments. "When we started, 80% of our investments were in short term investments, and the return was very low - 4 or 5%. Now things are changing and we have more sukuk."

However, he said that the tendency of investors to buy and hold sukuk made it very difficult to buy them in the secondary market.

There were also calls for takaful providers to simplify their products to make them more easily understood by consumers, and to improve their distribution. Abouzaid said any consumer taking out an Islamic loan should also be sold a takaful policy to guarantee against default.

Some speakers argued that mass marketing of takaful products was much easier through the bancatakaful route, but said that banks would need to be given incentives - probably bonus payments - to encourage their staff to promote the products. Others said that enabling a bank to offer a comprehensive portfolio of takaful products could be incentive enough.

Tony Ferguson, strategy director at software-as-a-service provider UniRisx, emphasised the quicker time to market that takaful providers could realise by using a hosted solution and paying according to how much they use it.

"A new takaful operation can be running state-of-the-art software in three weeks," he said. "Launching a new product takes seven to 24 months.

He also urged the use of technology in distributing takaful products. "The telephone as a means of selling and distributing insurance is diminishing," said Ferguson. "The internet is increasing.

The benefits of rating takaful companies for credit strength and Shariah compliance were also discussed, and John Willmott, COO of British Islamic Insurance Holdings, explained the challenges of establishing a takaful business under UK regulations.

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