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Dubai: Islamic Insurance (Takaful) industry is expected to experience improved premium growth this year supported by growing demand from key regions such as the Gulf Cooperation Council (GCC), Southeast Asia and Africa, according to ratings agency Moody’s.

“We expect global takaful premiums to keep growing moderately in the next two to three years. In the GCC region, the largest market for Islamic insurance, the spread of compulsory motor and medical cover will support demand, as will economic activity linked to planned sporting and cultural events, such as 2020 Expo in the UAE and the 2022 Fifa World Cup in Qatar,” said Mohammed Ali Londe, AVP-Analyst at Moody’s.

Experts speaking at the 14th World Takaful & Insurtech Conference in Dubai earlier this month said despite the slow pace of growth in premiums, the industry has huge potential for expansion.

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“According to the Islamic Finance Development Report 2018 by Thomson Reuters, the global takaful industry reached $46 billion in 2017. However, at just two per cent, it still remains the smallest contributor to the Islamic finance industry in terms of assets. This, despite that fact that currently close to 324 operators around the world offer Takaful. It is quite evident then that the takaful sector has tremendous potential to expand its role in the Islamic finance industry,” said Abdullah Mohammad Al Awar, Chief Executive Officer, Dubai Islamic Economy Development Centre (DIEDC).

Moody’s expects a widening of compulsory insurance, including coverages for Umrah and Hajj (pilgrimage) travel insurance, growing digital distribution and strong growth from new markets in Africa are expected to support premium growth and profitability of the sector.

Profitability gains

Moody’s is optimistic that the growth prospects for takaful remain strong in the GCC, Africa and South East Asia, where there are large Muslim populations and relatively low insurance penetration rates.

“We expect the GCC and south east Asian takaful sectors’ profitability to remain stable, with return on capital (ROC) of between 8 per cent to 10 per cent. This reflects adequate pricing on existing and new business, coupled with new distribution methods that will enhance operational efficiencies,” said Londe,

In Africa, the rating agency expects takaful insurers’ profitability to be volatile as regulations evolve, creating short-term compliance and operational hurdles. “We expect regulatory regimes to become increasingly sophisticated across all takaful markets as demand keeps growing. This will lead in turn to improvements in takaful operators’ risk management, underwriting, and reserving,” said Londe.

Globally, gross takaful premiums, or contributions, increased at a compound annual rate of 33 per cent between 2005 and 2010. Growth moderated to around 12 per cent between 2011 and 2013, and fell to 9 per cent between 2014 and 2017, albeit from a larger base.

Moody’s data showed GCC takaful firms’ published results for 2018 show that takaful premiums have continued to expand at around 7 per cent year on year, despite the region’s relatively muted economic growth. In South East Asia, takaful operators’ published 2018 interim results show a similar 7 per cent increase in dollar terms, rising to around 9.5 per cent in local currency terms.

In the GCC region, the introduction of compulsory motor and medical cover in Saudi Arabia and Oman respectively will support demand. The rating agency expects increased capital requirements currently under consideration in Saudi Arabia would, if adopted, drive consolidation of the takaful sector. The combined takaful groups that emerge will likely have stronger and more sophisticated capital.