By Wael Al Sharif
The Sharia-compliant insurance industry must make a more concerted effort to compete with conventional products
It is important to identify the reason as to why Islamic finance and Takaful came into being; after all, Takaful is a system, and not a product — a notion misconceived by many.
The ethical impact of this system must be understood in order for it to positively impact the daily lives of people, businesses and investors. However, this can easily be misunderstood as, other than the Sharia-compliant trait of Takaful, there is no major difference between Takaful and conventional forms of business.
However, businesses in the region are recognising the potential of Takaful and are moving towards the adoption of such policies — a trend highly visible in insurance companies. According to EY, the global Takaful industry is expected to reach $20bn by 2017, a trend we can see trickling into the GCC region, with the UAE and Saudi Arabia acting as key markets.
Up until very recently, the growth potential of Takaful insurance was not acknowledged in the GCC, but has been growing on a global scale. This growth is possibly a reflection of the lesson learned from the damaging effects of under-priced product selling — a phenomena extended to customers due to poor services. Companies were forced to rehash their stance towards policy pricing.
From a marketing and sales perspective, however — and it is unfortunate — sales representatives are only concerned about selling an insurance product without ensuring that it is a right fit for a customers’ needs. In our role as industry leaders, it is very important to understand the profound needs of our customers and provide solutions that cater to all of their needs.
Apart from companies having to change their policies, the adoption of Takaful was received very positively by consumers, underlining their continued demand for Takaful products, thus resulting in the double-digit growth the industry has experienced since the beginning of the decade.
This growth is also backed by the increased awareness due to government spending on infrastructure, and favourable regulatory changes in most of the GCC nations, such as the creation of a single Sharia board by the UAE Central Bank and UAE Cabinet to monitor the Islamic financial sector, enhanced requirements for liquid assets and more stringent corporate governance requirements that will benefit companies with robust financial structures, an experienced management team and diverse channels of product distribution.
Generally speaking, there is an imbalance of opportunities provided to both types of insurance — conventional and Takaful — as conventional insurance is more supported by market investments in the UAE than Takaful insurance companies. This is a big issue as these investments actually constitute around 60-70 percent of the total income in conventional insurance companies, resulting in limited profit margins for Takaful insurance companies, while conventional insurance companies hold a big portion of the market share in terms of investment revenue.
In order for the Takaful system to work within an already established conventional market, there needs to be a more concerted effort among its proponents to help it become entrenched in the market. This could potentially be started from markets where the majority of customers would prefer Sharia-compliant products (markets with a large majority of Muslims). However, since customers are already familiar with conventional products, the Sharia-compliant aspect of a business is taken as a mere label.
But the GCC insurance industry is moving from being a protected industry into a globally competitive sector. With governments realising the importance of efficient and stringent regulatory frameworks to support growth, the industry is witnessing several reforms to tackle challenges such as a highly fragmented regional market with intense competition. High valuations and limited market share are discouraging consolidation in the industry; however, stricter solvency and capital requirement regulations may push smaller players to consider merging to sustain their business and grow in the industry.
The increase in regulation has also impacted the profitability of some of the less developed insurers, as they struggle to meet the more rigorous investment and corporate governance requirements. The rollout of mandatory health insurance by the Dubai Health Authority (DHA) in January 2014 has been providing the workforce in Dubai with access to good healthcare when they need it. Through this initiative, the DHA endeavours to pave the way to enhance both the conventional and Takaful forms of insurance.
Going forward, the UAE’s strong population growth coupled with a healthy economy and the current rollout of mandatory health insurance deliver strong fundamentals for long-term growth for the Takaful insurance industry.
While some challenges do exist, they are far outweighed by the opportunities offered by an industry which is relatively new in terms of its existence. With the early adoption of new regulations, we see companies benefitting not only its shareholders, but its customers and employees as well.
Wael Al Sharif, CEO at Takaful Emarat.
Ex-KSA takaful is not growing. KSA is a co-operative rather than Takaful model. Takaful premiums grew because of rampant underpricing by new Takaful firms eager to reach optimal size. However the model is flawed due to misalignment of stakeholder interests. Managements are happy given their higher salary/cost relative to conventional, policyholders are happy as rates are low and shareholders are left holding the can! this cant sustain for long and shareholders/investors will eventually revolt. Time is ripe for consolidation.
With all due respect to the writer, an uninformed reader would like to know what Takaful even is and why it is a product of the Sharia system, and not a product....'a notion misconceived by many.'
Takaful is Mutual Insurance period