Global takaful potential remains underutilised

Dubai: The global takaful industry grew 16 per cent in 2012, a noticeable moderation from a 22 per cent compounded annual growth rate (CAGR) over 2007-201, according to a recent Ernst & Young (EY).

Takaful in most markets is still in its infancy, and its potential to replace conventional insurance in leading Islamic finance markets is still largely untapped.

Currently, Saudi Arabia, the UAE and Malaysia lead the industry with their relatively well-developed Islamic finance industry. The role of authorities in simplifying regulatory frameworks across borders and encouraging consolidation will also be key in propelling the industry’s expansion.

In order for the industry to maintain its growth trajectory, there is a need for larger regional players who can provide leadership for building capacity in the industry and to address a number of business risks that the industry executives cite as challenges to the industry as a whole.

“Takaful operators must adopt a clear strategy and capital plan that includes both organic and inorganic growth, and maintain and refine segmentation or exit and acquisition strategies, which can mitigate potential risks,” said Ashar Nazim, Global Islamic Finance Leader EY.

As industry leaders look beyond their borders, growth and profitability of the industry vary significantly by markets and sectors, depending on each market’s maturity, industry and regulatory structure.

“Adopting a multi-market approach not only helps manage risk diversification but also offers profitable opportunities in niche segments. Investing in rapid growth markets, which are often made up of young, growing populations, can lead to achieving critical mass very quickly. However, detailed market analysis and planning are required to ensure strategic success,” said Abid Shakeel, Senior Director of EY’s Global Islamic Banking Centre.

The rising popularity of takaful insurance globally is primarily supported by the countries in the GCC, Levant, Africa and South-East Asia.

According to a recent report by Moody’s Investor Service Takaful premiums contributed roughly 43 per cent to the GCC region’s composite premiums in 2010 compared to 31 per cent in 2005.

“These figures hide considerable country variations, with takaful usage at very high levels in Saudi Arabia, but still showing modest overall Takaful penetration in the UAE, Kuwait and other GCC markets. This high usage level in the Saudi market is driven primarily by compulsory medical insurance, via Takaful providers,” said Mohammad Ali Londe an analyst with Moody’s.

The majority of takaful premiums were contributed by family and medical products, of which less than 5 per cent of premiums were from family (or life) takaful. A similar growth trend is observed, albeit to a lesser degree, in the other Takaful target regions.

While Saudi Arabia, the UAE and Malaysia hold the lion’s share of the takaful market, the acquisition of market share has not necessarily translated into profitability in many instances. Financial performance and managing key strategic issues remain challenging for takaful operators in many markets.

According to Ernst & Young, there are three areas of development that need to be addressed in response to the issue of profitability such as efficiency in operation, quality of underwritten business and scale and solvency and capital requirements.

Most takaful operators have yet to achieve critical business volume despite incurring substantial establishment costs over formative years. Access to quality customers and potentially lucrative commercial lines are limited due to under-developed broker relationships. To achieve scale an solvency smaller players need to quickly build scale or consider mergers in order to meet these requirements.

Rapid growth markets are poised to become the new centres of development over the next 10 years. Investors looking to establish new takaful operations in rapid growth markets must be prepared for the long haul and be aware that the nature of returns will not be comparable to those of conventional issuers. Investments must be made on commercial merit rather than for altruistic reasons.