Islamic insurance, or takaful, an industry that mostly stands in the shadow of the much larger Islamic banking sector, will be in the centre of attention at the upcoming 12th annual World Takaful Conference, an influential gathering of Islamic insurance players to be held on April 11 and 12 in Dubai. The event, seen as the leading global forum for takaful, plays an instrumental role in the development of the industry and will this year have to address a number of issues, including low profitability despite sizeable growth in the takaful business, as well as questions about full Shariah-compliance of various insurance models takaful players
offer.
While takaful is a popular insurance method in Islamic countries, in the global arena it is still at a nascent stage of development, both in terms of product variety and in terms of frameworks and regulation. Takaful has indeed witnessed rapid growth, mainly in its core markets, the Gulf Cooperation Council (GCC) countries, Pakistan and Malaysia, with total assets doubling in the last five years, but in most other regions it has maintained niche status and needs much promotion as it navigates through the complex global insurance landscape.
Takaful is a type of Islamic insurance on risk-sharing basis, where members contribute money into a pooling system in order to safeguard each other against loss or damage. It is based on Shariah law which sets the case how individuals cooperate and protect each other.
The problem starts with this very Shariah-compliance. While takaful contracts in theory are set up as truly risk-sharing agreements, in a larger context the Shariah idea gets diluted when takaful companies invest fee inflows in non-Shariah-compliant financial instruments, insure their own risk with conventional re-insurers instead of re-takaful companies or simply lack consistency in following the underlying principles of mutuality in a takaful agreement, pressured by stiff competition on the overall insurance market.
In terms of profitability, takaful operators show relatively weak performance despite they normally charge higher fees on mutual protection agreements than conventional insurers. This has to do with their usually small size, short track records and focus on retail instead of commercial and industrial clients. Other problems are a small variety of products, unsuccessful product differentiation from conventional insurance products and overcapacity in the insurance markets as a whole which leads to aggressive price wars in which takaful players are sometimes struggling to stay afloat.
It is also a structural problem: For example, there are currently more than 70 takaful players in the GCC region alone, competing for fee income of just around $10bn, of which 80% originates from Saudi Arabia.
“The heavy competition, combined with net losses, is eroding capital strength of takaful players and damaging their credit profiles,” ratings agency Standard & Poor’s said in a recent report on the takaful industry.
“In our opinion, Islamic insurance companies require considerable capital investment to become established, yet relatively new companies often come under pressure to generate profits and deliver healthy returns to their investors,” the report points out.
Ratings firm Moody’s also remains cautious. Although the agency’s analysts expect takaful growth to remain at double-digit levels in 2017 and gross contributions to reach $20bn globally at the end of the year, they acknowledge that annual growth will slow down from around 20% in the past couple of years to below 15% in most key markets.
Experts ahead of the World Takaful Conference recommend a shift in strategy towards alternative consumer segments and the exploration of merger options, together with a much-needed harmonisation of regulatory frameworks for the fragmented takaful industry. The absence of common regulations to allow players to operate across different takaful models is seen as a major obstacle on the way to develop a market-wide strategy that highlights the unique features of Islamic insurance and achieves sustainable long-term growth.
The Syarikat Takaful Malaysia headquarters (centre left) stands in the Jalan Sultan Sulaiman area of Kuala Lumpur on August 27, 2014. Takaful has indeed witnessed rapid growth, mainly in its core markets, the GCC countries, Pakistan and Malaysia, with total assets doubling in the last five years, but in most other regions it has maintained niche status and needs much promotion as it navigates through the complex global insurance landscape.
