By Claire Ferris-Lay
The Takaful market is booming, with a host of firms queuing up to go public across the GCC.
The Takaful market is booming, with a host of firms queuing up to go public across the GCC. However, as Claire Ferris-Lay reports, Islamic insurance faces a set of tough challenges if it is to escape the shadow of its conventional counterpart.
It has been a good summer for Wan Zamri. Earlier this month, the general manager of Dubai-based Islamic insurance firm Takaful House took his company to market on the Dubai Financial Market (DFM), and was pleased to discover his company's 55 million shares were 100 times oversubscribed at the initial public offering. Still, such high demand was no more than Zamri expected.
"I wasn't surprised, because the previous Takaful companies also fared very well," he shrugs, pointing to the success of Abu Dhabi-based Methaq Takaful Insurance - which raised $98m and was 43 times oversubscribed in February - and Takaful Emarat, whose shares listed on the DFM soared 346 percent in their debut week in July.
There are relatively few Islamic scholars who focus on insurance... [so] there is a tendency to keep going back to conventional practices.
"The market is huge for Takaful, and it really is untapped," continues Zamri. "We're just seeing natural growth."
In the last six months, four Islamic insurance - or Takaful - companies have listed on the UAE's bourses, taking the total number of publicly traded Takaful firms to seven in the Emirates alone. According to Ernst and Young's 2008 World Takaful Report, 59 out of a world total of 133 Takaful operators are currently plying their trade in the GCC.
While insurance penetration levels in the Gulf are low compared to the West, they are rising steadily - and insurance providers looking to escape the global economic slowdown elsewhere are focusing on Islamic insurance as a viable alternative to conventional vehicles.
"Risk protection has always been provided through family structures [but] now Takaful insurance is trying to replace that," says Kevin Willis, a credit analyst for Standard & Poor's ratings services.
The GCC insurance sector has the potential to quadruple its premium pool to $20bn but it is imperative to raise the awareness of Takaful, which could grow 24-fold to $4bn in the medium term, the ratings agency said in a recent report.
Takaful insurance allows participants to pay their contribution into a pooled fund which is then invested in Sharia-compliant investments, with any profits put back into the fund. Claims are paid from the fund, and if there is any extra cash at the end of the year, it is distributed as a discount for the next year's premium.
The GCC is already the world's largest Takaful market globally. According to Ernst and Young, the region contributes more than 50 percent of the total Takaful contributions worldwide. In 2006 GCC contributions exceeded $1bn compared to global contributions of $2bn.
"I believe the Takaful industry will grow in leaps and bounds over the years," says George Oommen, executive director of insurance and reinsurance at Dubai International Financial Centre. "Most of the international companies have already got the basis to invest in it because they already have Islamic windows.
Analysts all agree that the potential for Takaful's growth is huge. Currently just one percent of the world's overall insurance industry is Takaful, but analysts predict the market in the GCC alone is growing at around 40 percent per annum. Credit ratings agency Moody's estimates that the global Takaful market will be worth $7.5bn in contributions by 2015, while another report by HSBC estimates that the figure will be nearer $14bn.
Saudi Arabia, home to the region's biggest population, is considered to have the most potential for growth for the industry in the GCC - particularly after the kingdom liberalised its insurance sector in March and made it compulsory for all firms to cover their workers with health insurance. But its potential is not confined to the GCC or its Muslim population.
In the 1980s, Takaful emerged as part of Malaysia's pioneering Islamic finance development, and is now a popular method of insurance throughout the country. The UK's large Muslim population is also proving a significant growth market - just last month, Salaam Insurance offered Britain's first ever Sharia-compliant car insurance product.
"For many years people have considered insurance inherently un-Islamic [but] that has been slowly going away," says Oliver Agha, head of Islamic Finance at DLA Piper, the world's largest law firm. "And as that notion falls away more Islamic insurance companies will start coming up."
It is not only standalone Takaful companies investing in the industry's growth. A number of traditional insurance companies and banks are offering Takaful products. In June Dubai Banking Group announced it would be creating the world's largest Takaful firm, with a total capital of $300m, together with Malaysia's investment arm Khazanah Nasional and Asian Capital Reinsurance.
This month Qatar Islamic Bank also announced plans to set up a large Takaful company, while reinsurance company Hannover Re established its Islamic reinsurance subsidiary, Hannover ReTakaful, in Bahrain in December 2006.
"When there is low penetration from a segment there is obviously a huge appetite for people trying to penetrate the market," says Oommen.Yet despite the unquestioned potential of Takaful in the GCC, analysts argue that there are a number of challenges the industry must address if it is to continue to grow.
Analysts have suggested that given the size of the Takaful market in the GCC - which still pales in comparison to its conventional counterpart - the number of companies offering Islamic insurance services is already close to saturation point.
"It's not obvious that there was a need for another Takaful company in the UAE," says Raj Madha, equity analyst for EFG Hermes in Dubai.
"The challenge for a new Takaful companies is to expand the market and compete aggressively against the conventional players. Otherwise it is difficult to see how much room there is for Takaful insurance to be as successful as Islamic banking."
But it is not just saturation that risks hampering the growth of Takaful. A fundamental lack of awareness of what Takaful actually is and how it works, as well as a lack of scholars and low insurance penetration rates in the Arab world, could also hinder its progress.
In many ways today's challenges facing the Takaful industry mirror those the Islamic finance world did some years ago.
"I think the theological underpinnings [of Takaful] need to be fully thought through before people will believe it is a viable product and genuinely Islamic," says Peter Hodgins, senior legal consultant for DLA Piper.
"We had the same issues when Islamic finance first appeared, people simply said this is recreating conventional structures under different names," he adds.
Hodgins believes there are three main challenges: a lack of Islamic insurance scholars who properly understand the product, its structure, and the question of surplus.
"The question of surplus is a problematic area," he explains. "One of the distinguishing features of traditional insurance is that at the end of the year the operator is supposed to make a return of the profits it's generating to the participants.
With Takaful insurance all participants get something back, but in practice the issue arising is that it's taking time for the Takaful operator to build up adequate reserves for the losses, so surpluses are not in practice being paid out by many Takaful operators."
Hodgins' concern is that Takaful will start to mirror traditional forms of insurance by using the same policies: "The danger then is that the Muslim community, who are particularly interested in buying Sharia-compliant products, will start to loss faith in the whole system."
Takaful also faces challenges in attracting Islamic scholars who understand the complex field of Sharia-compliant insurance. Hodgins warns that if the industry continues to attract professionals from conventional forms of insurance rather than the Islamic finance industry, then the line between Sharia-compliant and conventional vehicles could become blurred.
"There are relatively few Islamic scholars who focus on insurance," he says. "The core staff at the moment will be recruited from [traditional] insurance companies and once that happens there is always going to be a tendency to keep reverting back to conventional insurance practices."
Like Islamic finance, industry experts believe that a lack of awareness represents the Takaful industry's greatest challenge. Even those aware of the benefits of Takaful can choose not to take out insurance, based on the public perception that insurance is not essential.
The GCC still has markedly low penetration rates when compared to the West. According to Gulf Research Centre, the GCC insurance industry represents a mere 0.14 percent of the world's market.
"The biggest hindrance to the growth of Takaful is that the community in which we would expect it to be a success, like the Middle East, is not used to having insurance," explains Willis.
"Risk protection has always been provided by an individual authority. Islamic insurance is now trying to take that on, but it is doing so within the mindset of that community."