By Daniel Stanton
A look at the takaful industry that is starting to reach its potential, as local developers look to new products and strategies.
Takaful - or Shariah compliant cooperative insurance - has been a hot topic in the Middle East for some time, but as with conventional insurance, the local penetration rate remains low. However, studies have predicted that takaful, having already been popular in Far East Muslim countries like Malaysia, and in Iran, will see rapid growth in this region in the coming years.
Qatar Financial Centre, which has been particularly successful in attracting insurance firms to set up headquarters in its jurisdiction, points out the insurance penetration rate in the GCC increased from 0.57% in 2001 to 0.79% in 2005, although this is still far below the world average of 7.52%.
They need to increase their paid-up capital to be able to carry more risk.
Standard & Poor's, which has rated more takaful companies than any other ratings agency, stated in a recent report: "Over time, if the world average insurance premium of US$550 per capita is achieved and applied to the Gulf states, the GCC insurance market has a potential size of $20 billion (currently $4.6 billion).
"Taking as an example Malaysia, where the takaful market is expected to contribute 20% to the overall market in the medium term, the GCC takaful market has the potential to reach $4 billion at the current level of development (currently $170 million)."
In a recent report, Moody's estimates that the global takaful market will be worth $7.5 bn in contributions by 2015, while another report by HSBC estimates that the figure will be nearer $14 bn.
Parvaiz Siddiq, general manager of Salama, a UAE-based takaful firm, predicts that the global takaful industry will be worth $10 bn by 2015 - a significant increase on last year's figure of $1.1 bn.
Salama has takaful operations in the UAE, Saudi Arabia, Egypt, Algeria and Senegal, in addition to a retakaful operation in Tunisia.
"We are very upbeat about the takaful market - there is a lot of potential," says Siddiq. "Slowly, takaful is making inroads into the corporate sector, and Saudi Arabia is going to be one of the biggest markets." In common with other takaful providers, Salama has to decide whether to develop brand new products for takaful, which could be costly and time-consuming, or whether to adapt existing products from the conventional insurance industry. "It is possible to use the template of conventional products and modify them to ensure Shariah compliance. Do we need to develop totally separate takaful products?" asks Siddiq. "Why reinvent the wheel?"
On the other hand, he recognizes the need for innovation and new takaful products developed with the local market in mind. Salama is currently in the process of launching unit-linked takaful products developed in-house, which are supported by high-tech IT systems.
One conventional insurer that is set to make the move into takaful is Axa Insurance (Gulf). The insurer will first develop a conventional life offering, before launching takaful services. It is currently considering whether to acquire an existing takaful firm, or to develop its own products and services from scratch.
Andrea Rossi, CEO, Axa Insurance Gulf and Middle East region, says: "There's a big new market coming up in life and wealth management, and that's what we're going to move into. We're going to compliment our existing property and casualty portfolio with new products in life: conventional term life and savings products.
"But of course when you're talking about that you also need to start thinking about people who do not accept the conventional way of insurance and therefore you need to start looking at takaful."
Rossi admits the takaful market is small at present, but sees huge growth potential. "It's about 10-15% of the overall life market which already is a smaller market of the general insurance market here in the Gulf," he says. "The life market represents 20% of the overall insurance market here in the Gulf, maybe even less."
Axa is well-positioned to tap into demand for takaful from the GCC and Southeast Asia. "We are a global company and we are present in all these markets, so it make sense for us to get into takaful, which is going to grow like any other segment," says Rossi. "It's a new segment so we'll have growth of 30, 40, 50% a year, but eventually it could be worth $10-15 billion in premiums on a worldwide basis within the next five to six years.
"We believe with our expertise in life, property and casualty, and being one of the world's leading organisations, this is something we can bring additional value to. I believe that the Gulf is a strong basis for our growth."
Axa Gulf, which has a presence in five of the GCC states, will be taking a regional approach to developing its takaful offering, which will allow it keep unit costs low and pass savings on to policyholders.
With the largest population in the region, Saudi Arabia is considered to have huge potential for the takaful industry, especially as it liberalises its insurance sector and makes it compulsory for all firms to cover their workers with health insurance by March 2008.
The lack of a global uniform set of regulations for takaful is a major obstacle.
In August, Solidarity signed a memorandum of understanding with Ahad Insurance Company, headquartered in the Kingdom of Saudi Arabia, to establish an insurance company that complies with Shariah, with SR400 million in paid-up capital. It will focus on providing general and family-related insurance solutions in the Kingdom.
"There are a lot of business transactions taking place in Saudi and I believe that insurance plays a major role in supporting such business transactions and growth," says Bassel Hanbali, head of corporate communications and marketing, Solidarity. Solidarity is broadening its reach to new markets through joint ventures and cooperation agreements.
"The direction that we are taking at this point is not just providing takaful products, but also providing management experience and operational experience to other insurance players in the market," says Hanbali. This includes an agreement with Qatar Islamic Bank to distribute Solidarity's products in Qatar, and various tie-ups with insurers in other countries to leverage their local knowledge and exposure with Solidarity's own technical knowledge and range of products.
Despite the strong growth predictions, Hanbali thinks there are several challenges facing the Middle East takaful industry.
"The industry really lacks professional human resources," he says. "You'll be a lawyer - you don't have a job, so you'll come into insurance. We need institutions like the BIBF (Bahrain Institute of Banking & Finance)."
He also believes that many takaful firms are not backed by the funds they need to develop. "Takaful companies are undercapitalised," says Hanbali. "They need to increase their paid-up capital to be able to carry more risk, and provide research & development and product range."
To this end, Solidarity is currently undergoing a private placement, which will see it increase its share capital by $125m to $275m, which Hanbali says will make it the world's largest takaful company by share capital. It will also bring in shareholders from key international markets.
Hanbali believes takaful firms need to build alliances with banks, conventional insurers and other takaful firms to develop new products. "Takaful firms need to be innovative and not just Islamise conventional insurance," he says. "They need to do research and try to find out the needs of the market."
Chakib Abouzaid, CEO of Takaful Re, agrees that there needs to be more innovation in the region's takaful market. "In the Middle East, takaful companies are new or small companies, and unfortunately we are not seeing till now a general trend towards innovation, except a few attempts in family takaful via Bancassurance," he says. "In the Far East, the experience is different, as the companies are more innovative, especially in family takaful (Malaysia), and committed to surplus distribution (Malaysia, Brunei, etc.). On the general side, innovation is yet to come and strategies are not focused on personal lines."
He believes that the recent takaful boom has been driven by several factors: petro-dollar surpluses in Malaysia and the GCC, the growth of a middle class in these regions, the evolution of religious and cultural practices, and the maturity of Islamic financial institutions, which are now looking to benefit from the synergies of takaful with their core business lines. However, Abouzaid says that innovation will be the factor that decides which takaful providers succeed.
"In the coming years, we will see new takaful and companies converting from conventional or cooperative models to takaful," he says. "The demand exists, as the penetration rates are very low and the GDP per capita growing, but the supply should also be able to draw the ‘sleeping' demand. The coming evolution depends on takaful companies' strategy and ability to differentiate themselves by innovation."
One sector that needs to be developed is Shariah compliant reinsurance. Abouzaid says: "We are still using conventional reinsurance because we do not have an available retro takaful capacity. Takaful Re needs to have first class securities to protect our takaful fund and our policyholders and shareholders. Moreover, a first class retrocessionaires [reinsurers of reinsurers] panel is a condition to maintain an adequate rating."
The different regulatory requirements for takaful in different jurisdictions could also be a barrier to the sector's growth, according to Asif Mumtaz, regional head of HSBC Amanah Middle East.
"The product coverage differs as per the market demand and regulatory requirements," he says. "The lack of a global uniform set of regulations for takaful is a major obstacle that is impacting growth of the industry.
There has to be a collective and collaborative effort between the regulators, providers and Shariah scholars to address issues surrounding corporate governance, transparency and supervisory reviews. Only then will takaful be able to realise its full potential and unprecedented growth."
HSBC Amanah already has several takaful products, but intends to expand its offering. "Takaful is one of the key focus areas for HSBC Amanah in the Middle East as we expect the next few years to witness dramatic growth in takaful within the region," says Mumtaz.
"We currently provide basic takaful products to our customers and plan to enhance the product set to include the full spectrum of takaful plans that include, but are not limited to, investment, education, travel, care, vehicle and home."
There is little doubt that the takaful industry will continue to create opportunities for innovators. Whoever can develop new products tailored for the region and suitable distribution strategies could capture a substantial share of this rapidly developing and lucrative market.
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