Takaful companies, like other Islamic finance companies, face a wide variety of challenges that vary from one country to another, on top of the general insurance challenges, as well as issues related to their individual circumstances.

Some of these include Sharia standardisation, developing regulatory and governance frameworks for takaful, consumer awareness/attraction, and the availability of re-takaful (Islamic re-insurance). In addition, takaful companies continue to face competition from conventional insurance companies, many of which are more established.

Takaful and general insurance are at different stages of development in various Islamic finance markets, and practices differ from one country to another. For example, in Saudi Arabia, insurance is provided by insurance companies operating in accordance with the principles of cooperative insurance, which states that the provisions of the articles of incorporation should not be inconsistent with the provisions of Sharia.

Whereas in the UAE, Malaysia and Pakistan, takaful is the dominant form of Islamic insurance. In the UAE, takaful made up 15 per cent of the total insurance market in 2017, with health and motor takaful dominating the business by gross written premiums (GWP).

Saudi Arabia’s cooperative insurance model is a Sharia-compliant structure where 10 per cent of the net surplus of an insurer’s profit is returned to policyholders annually, by direct payment or reduction in the premiums for the following year. However, in contrast to takaful, it does not include any provisions relating to Sharia-compliant investment requirements, Sharia-compliant boards, or the segregation of takaful funds from shareholder insurance funds.

Still, most licensed Saudi Arabian insurers also offer takaful products.

Moreover, the Saudi Arabian cooperative insurance market is concentrated in health and motor, accounting for 52- and 31 per cent of GWP, respectively, in 2017 (2016: 51- and 33 per cent). Life insurance makes up only a small proportion of the Saudi Arabian insurance market.

Its growth is constrained by the relatively generous social security arrangements for locals and the ability of non-Saudi employees to buy life insurance products through other countries in the region.

In Malaysia, the takaful segment is likely to benefit from the government’s push for affordable insurance and higher insurance penetration, particularly as Muslims dominate the country’s population. The greater adoption of technology, particularly in distribution, will be important for operators to capture untapped population segments and younger consumers with greater cost-effectiveness.

There are three main types of takaful customers: the first are customers who are Sharia-sensitive; second are customers that are not totally Sharia-sensitive (and may not even be Muslim) but relate to the concept; and finally are customers and businesses that recognise takaful has a competitive offering.

— Bashar Al Natoor is Global Head of Islamic Finance at Fitch Ratings.