GLOBAL REPORT
Global Takaful: Pausing for breath?
Is the global market for Shariah compliant insurance and reinsurance —
Takaful and re-Takaful — pausing for breath? EY thinks it may be. In its
shares his insight.
Industry participants have no misgivings about the continued
Muslims account for almost a quarter of the global population,
Shariah compliant assets still make up only about 1% of the
world’s total. This suggests there is still abundant room for
Nor do analysts have any doubt as to the compelling growth
potential of the Takaful (mutual guarantee) and re-Takaful
observes in its most recent analysis, whereas the share of Islamic
share of the Takaful market in the two regions is still only 15%
and 10% respectively. In other words, Takaful has been slower
to develop than other Islamic product areas. According to The
early stage of development with premiums estimated to have
was generated in Iran where Takaful is the compulsory form of
insurance”. To date, growth in the Takaful sector has been driven
largely by a handful of countries, with four countries accounting
for 90% of the total global market . Even in the GCC, however,
which has been one of the fastest-growing regions for Takaful
in Saudi Arabia, underpinned by compulsory medical insurance,
but take-up has been relatively modest in other GCC member
countries.
This is changing, and one conspicuous theme of 2013 was the
expansion in the Takaful sector outside its core markets. In the
GCC, for example, the growth potential of the industry in Oman
such as Al Madina Takaful and new entrant Takaful Oman.
Competition is expected to be stiff, given that there are more than
20 insurance companies in the market, but Takaful companies
are hopeful that they can capture a share of 5-10% of the market.
Beyond the Middle East, Takaful has continued to increase its
penetration in regions ranging from Africa and Asia to Europe.
Africa, issued guidelines for the centralized oversight of its fastexpanding Takaful industry in 2013. In April, the vice-chairman of
the Chartered Insurance Institute of Nigeria (CIIN), was quoted
as saying that Takaful had now attained a 70% penetration level
in the country’s insurance industry.
announcing the development of a new Shariah compliant
insurance platform using a syndication model to spread risk more
Formidable competitive challenges
insurance will support a continued rise in gross contributions in
of the sector’s growth, however is that concerns have been rising
about a lack of discipline in the Takaful market. Foremost among
these misgivings are that intense competition within the industry
sector. These competitive pressures have been exacerbated by
the number of newcomers to the fast-growing industry, many of
them relying on aggressive and possibly uneconomic pricing in
order to challenge established conventional insurers in a market
11 of the country’s 23 national insurers are Takaful companies.
The result of this fragmentation, according to research published
by AM Best, is that the largest of the Takaful specialists, National
registered insurers active in the market, according to the AM Best
prospects of the Takaful sector, however, has been regulatory
fragmentation and the absence of standardization in Shariah
compliance globally. This has made cross-border expansion by
the larger and more innovative operators prohibitively costly.
That in turn has held back the economies of scale that could
be generated by more effective internationalization of the Takaful
industry.
The combination of competition and overcapacity were the
set up in 2012 — has continued to promote the growth of Takaful,
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February 2014
GLOBAL REPORT
2.3% market share remains modest, suggesting there is still
considerable room for growth. More broadly, industry analysts
believe the under-development of Takaful relative to conventional
insurance will continue to underpin its long-term expansion, with
weakness is one reason why an encouraging feature of the
Takaful sector in 2013 was the tightening of regulatory standards
and capital and solvency requirements in a number of key
markets, which industry analysts believe will allow the industry to
mergers in the industry, helping to strengthen Shariah compliant
national champions that are better equipped to compete with the
entrenched players on the conventional side of the insurance
sector.
The emergence of larger, better capitalized operators in the
Takaful sector would allow the Shariah compliant industry to play
a more prominent role beyond the retail, motor insurance and
small business markets. Takaful has yet to play a meaningful
role in underwriting risks in big-ticket developments, such as
the infrastructure projects that are planned throughout the
Islamic world over the next decade. As one industry participant
has noted, “this situation calls for creation of larger re-Takaful
companies that have the capital size to cover larger size risks.”
Aside from restricted the role played by Shariah compliant
small size of the re-Takaful sector has limited opportunities for
Takaful insurers to lay off risks in other areas of the economy.
Already, a process of consolidation has begun to gather
momentum in Malaysia, which has been catalyzed by the
implementation of the Islamic Financial Services Act (IFSA) which
came into force in July 2013. Among the comprehensive changes
introduced in this Act is a requirement for all licensed insurers to
split their businesses into separately licensed life and general
this requirement is that life and conventional insurance/Takaful
the long-term health of the industry if these risks are separated,
particularly from a solvency perspective.”
A notable recent example of consolidation in the Malaysian
insurance sector has been the acquisition by Canada’s Sun Life
market and has rebranded the Shariah compliant operation as
Sun Life Malaysia Takaful, has ambitious growth plans. Through
the development of a new multiple distribution center, the group
is aiming to climb from 12th position in the ranking of Malaysian
insurance companies to 8th by 2015. Industry analysts believe
that the recent legislative change in Malaysia will encourage more
further consolidation across the country’s life insurance, general
insurance and Takaful sectors due to the new regulations.”
still accounts for about 83% of all premiums written in Muslim
countries. This growth will be supported by robust economic
Government support
In some regions, growth will also be supported by governments
committed to promoting more widespread insurance penetration
services sectors. A striking objective of Malaysia’s Economic
Transformation plan, for example, is that by 2020, 75% of the
population will be covered by at least one insurance policy,
which compares with a penetration rate of 54% at the end of
2012. Accelerated growth in the Malaysian Takaful market will
be underpinned by initiatives such as the 1Malaysia Micro
incomes access to insurance cover. Another market that has
is Turkey, where gross insurance premiums are projected to grow
by 16% between 2013 and 2015. The government has taken the
Turkey, issuing a number of highly successful Sukuk in the last
two years, serving as benchmarks for other issuers and providing
an acceptable investment alternative.
The potential of Family Takaful
Another likely trend in the continued evolution of the global Takaful
sector, think some analysts, will be the growing importance of its
use as a savings vehicle through the growth of Family Takaful.
anything other than human life. The latest edition of the Milliman
Global Family Takaful report forecasts that the Family sector
Milliman, which advises that the underlying drivers of growth in
Family and General Takaful are “markedly different”, notes that
Family Takaful is posting especially rapid growth in Asia. “In
the Middle East,” Milliman reports, “Family Takaful penetration
has not been as rapid, though the region has all the necessary
than General Takaful.”
In conclusion, Takaful continues to face a number of formidable
challenges as it seeks to compete more effectively with its
conventional counterpart. However, its longer-term prospects
remain bright, given its importance within a broader Islamic
consulting
www.IslamicFinanceConsulting.com
formative stage”.
www.IslamicFinanceEvents.com
www.IslamicFinanceNews.com
www.IslamicFinanceTraining.com
www.MIFforum.com
www.MIFmonthly.com
Elsewhere in Asia and the Middle East, similar legislative change is
also expected to strengthen the Takaful movement. In Indonesia,
for example, which is the world’s most populous Muslim country,
a new law is expected to be passed in 2014 which would require
insurance companies to spin off their Shariah compliant units. It
is believed that this will lead to a wave of consolidation among
these units – of which there were 37 in late 2013 — as insurance
companies explore ways of ensuring that they meet tough
minimum capital requirements. Although assets in Indonesia’s
Takaful sector expanded by almost 43% in 2002, the sector’s
February 2014
www.MIFtraining.com
www.REDmoneyBooks.com
Sohail Jaffer
Email: [email protected].
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