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Dubai: Takaful is an Islamic alternative to conventional insurance and is very similar to conventional insurance, when considering its perks. But it’s vital that one, when opting for either of the two, looks at how Takaful insurance policies work – which we look at below, alongside how the UAE Takaful market functions.

When compared to its counterpart, the way Takaful insurance works is very different. Under a conventional insurance arrangement, the ‘insurer’ sells an insurance policy which offers protection against specified risks, and the ‘insured’ buys the policy at a given price.

Takaful versus conventional insurance

However, as opposed to how conventional insurance plans function, Takaful insurance works like a cooperative arrangement. A group of individuals contribute a certain amount of money, which is pooled in collectively. This pool of money is used to compensate any member of the group in the event of a loss.

The joint Takaful fund is then managed by a Takaful operator on behalf of the individual participants. The operator charges a fee for its fund management, marketing and underwriting services. After the claims are met, any surplus left in the Takaful fund belongs to the participants.

Takaful-branded insurance is based on Sharia or Islamic religious law and covers health, life, and general insurance needs. Any claims made by participants are paid out of the Takaful fund.

Takaful plans are now available to meet a wide range of insurance requirements, both life and non-life. Under general Takaful insurance plans you can find auto, health, and travel, as well as other covers relevant for businesses.

Takaful insurance picks up pace in the UAE

UAE is the second largest market for Islamic insurance after Saudi Arabia. In the UAE, among other Shariah-compliant offerings, Islamic banking products such as Takaful insurance makes up a significant portion of the market.

Anita Yadav

Most insurance activity in the UAE is conducted along conventional lines, but a vibrant sharia-compliant segment is slowly emerging

- Anita Yadav, CEO of Global Credit Advisory

“Most insurance activity in the UAE is conducted along conventional lines, but a vibrant sharia-compliant segment is slowly emerging,” said Anita Yadav, CEO of Global Credit Advisory.

When breaking down the UAE Takaful market even further, while health insurance makes up nearly half of the market’s demands, car insurance makes up a quarter. Out of about 60 insurance companies operating in the UAE, 12 national companies offer Takaful insurance plans.

These include Noor Takaful, SALAMA – Islamic Arab Insurance Company, Aman Takaful, Abu Dhabi National Takaful Company, Al Hilal Takaful, Methaq Takaful Insurance, Dar Al Takaful, National Takaful Company – Watania, and Takaful Emarat. Dubai-based Islamic Arab Insurance Company (SALAMA), which was first founded in 1979 is the world’s largest Takaful provider.

The GCC Takaful market saw its aggregate net profit surge by 74.3 per cent year-on-year to $414 million in 2019, according to the full-year results announced by publicly listed Takaful operators across the region last year. Other major global players include JamaPunji, AMAN, Salama, Standard Chartered, Takaful Brunei Darussalam Sdn Bhd, Allianz, Prudential BSN Takaful Berhad, Zurich Malaysia, Takaful Malaysia and Qatar Islamic Insurance Company.

Global Takaful premium growth has held up in the past decades, with further growth seen post-pandemic

UAE Takaful sector steady amid COVID-19

With the slowdown in world economic growth, the Takaful industry has also suffered a certain impact, but still maintained a relatively optimistic growth and analysts believe that in the next few years, Takaful market size is on track to expand much further.

“UAE’s Takaful sector has faced significant economic headwinds in recent years owing to low oil prices and more recently the COVID-19 outbreak,” Yadav added. “In addition recent regulatory changes have further challenged Takaful insurers.”

“For example, few years ago, the UAE Insurance Authority (IA) issued rules that limited insurers’ exposure to real estate to a maximum of 30 per cent of invested funds, and required them to maintain a minimum 5 per cent exposure to cash and deposits,” Yadav said. “Nevertheless, the segment has continued to expand its aggregate premium at a steady pace of 2-5 per cent per annum.”

When it comes to regulations, the UAE’s insurance market regulator, the IA introduced a broad set of regulations in 2010 governing Takaful insurance, and some more norms in 2014, to regulate and oversee all financial aspects involved in the management of Takaful companies.