Takaful gif


Exploring Takaful and Retakaful The net worth of the Islamic financial industry is estimated to reach over US $2 trillion dollars by 2015, and a large part of its unprece- dented success has been due to sectors such as Takaful Islamic insur- ance, and ‘Retakaful,’ the re-insurance of Takaful business whereby an insurance company can transfer to another insurer. The global Takaful market is becoming increasingly popular, as countries from around the world are continuing to tap into this lucrative sector. There have been many highs and lows in the progression of the global Taka- ful sector, and Global Islamic Finance Magazine aims to review them within this article. It is important for anyone concerned in Islamic busi- ness to first re- familiarise themselves with the Takaful industry and how it operates, in order to really appreciate its successes and mile- stones throughout the years.


Takaful Islamic insurance can cover many sectors; family, health, edu- cation and medicine amongst many others. Takaful literally means “guaranteeing each other.” It is based on the principles of “Ta’awun” (mutual co-operation) and “Tabaru’a” (donation), whereby a group of Takaful Participants (policyholders) agree between themselves to share the risk of a potential loss to any of them, by making a donation of all or part of their Takaful Contribution (premium) to the Takaful Fund.


The fund will then compensate the Participants for any loss. The Taka- ful Fund is invested strictly in Halal activities under non-interest bear- ing conditions, with the aim of maximising the fund value. All Taka- ful Contracts are managed by an appointed agent, who provides all the necessary marketing, operational facilities and administration required to serve the needs of the Takaful Fund and the Takaful Con- tracts. The very first Takaful company, the Islamic Insurance Company of Sudan, was established in 1979.


Today, in 2010, there are 28 registered Takaful companies worldwide which write Takaful agreements directly, and ten more which oper- ate as Islamic windows or marketing agencies placing insurance risk with both conventional and Takaful companies - and those numbers are continuing to grow. In fact, the number of Takaful companies is higher than these figures would suggest, as all insurance companies in Sudan for instance are deemed to operate in accordance with the Shariah principles. In addition, new Takaful companies have been es- tablished recently in Sri Lanka and Tunisia. At least four more Taka- ful companies are under formation in the Middle East, including in Kuwait, the UAE and Egypt. Several other Takaful companies are be- ing contemplated in various countries such as Pakistan, Australia and Lebanon. Furthermore, South Africa, Nigeria and some of the former states of the Soviet Union are also contemplating tapping into the Takaful market.


2010: A Year of Milestones for the Takaful and Retakaful Sectors The Takaful and Retakaful sectors have experienced both highs and lows and throughout 2010. There has been real progress towards mak- ing Takaful a sector which is globally recognised amongst many finan- cial institutions around the world. It was predicted that in 2010 alone the Takaful industry will surpass US $8.8 billion in contributions.


According to Sameer Abdi, Head of Ernst & Young Middle East Islamic Financial Services Group, “We are entering a new and changing world, where quality of strategy execution and capital planning are on top of the management agenda. Global Takaful contributions grew 29 per cent in 2008 to reach US $5.3 billion, and remain on course to sur- pass US $8.9 billion by 2010. The industry has certainly shown resil- ience during the global financial crisis. Strong growth in the health of Takaful in the GCC, and family Takaful in Malaysia, are two noteworthy trends that have delivered growth for many operators. Government safety nets are being reduced, providing new opportunities to offer product solutions in these respective business lines.”


Tony Ferguson, VP of Sales, EMEA for Unirisx


Microinsurance, Takaful, Cloud Computing and Mutuality


What are your views on Takaful progress in 2010? As an economist who has been condemned to spend my career in IT, my views on the Takaful industry are a fusion of macroeconomics and technol- ogy. With GWP exceeding $3bn for the first time, 2010 has seen Takaful make good progress in written premiums and expansion into new territo- ries. The greatest penetration continues to be in Malaysia, though even there it accounts for less than 10% of the overall insurance industry. The conclusion of my report card would be that Growth and Potential continue to be constrained, primarily by ineffective technology, uncompetitive prod- ucts and a shortage of skilled practitioners. Takaful operators have a higher combined ratio than conventional insurers. Even allowing for the additional start-up costs of a nascent operation and acknowledging that upfront fees often do not reflect expense in the Wakala model, the fact is that admin- istration costs are comparatively high due to inefficiency of processes and the use of outdated legacy systems. This translates into policies which are poor value for money. The aftermath of the financial crisis has served to reinforce the values of Islamic Finance generally and Takaful is undoubt- edly benefitting from the global swing towards Mutuality. Organisations like HSBC Amanah Takaful will confirm that more than half their Takaful cus- tomers are non- Muslim.


What are the future challenges for Islamic insurance and how can they be overcome? In the global insurance industry, 2011 will start to see the confluence of three big trends: Microinsurance, Takaful and the accelerating mainstream adoption of Cloud Computing. The 2010 Swiss Re Sigma Report on Microin- surance projected an industry which would reach 4 billion people and gen- erate GWP of $40bn. Highly compatible culturally and geographically and powered by the strong perception of Mutuality, Microinsurance and Takaful will draw closer together and fuel reciprocal growth. Organisations like Al- lianz are already prominent in “Microtakaful” and many more will follow. Microinsurance and Takaful share the same challenges to reduce admin- istration and distribution costs: through Cloud Computing, the technology is available, proven and is underpinned by innovative commercial models which reduce costs and link Risk with Reward.


For the uninitiated, “Cloud Computing” includes both “Software as a Serv- ice” and “Infrastructure as a Service”*. There is no need to invest in soft- ware, hardware nor infrastructure — so a Takaful provider can distribute and administer anywhere there is an internet connection, and give free access to brokers, agents, and affinity groups so connecting the demand for Shari- ah compliant insurance with low cost supply, powered by the ubiquity of the Internet. Typically costs are determined by usage in the Cloud model- which brings the benefits of predictability and elasticity, since should business volume require more infrastructure to support it, that is the responsibility of the Cloud provider. It also offers a simplified capital and expenditure model as well as increased agility for cloud customers who can easily expand and contract their IT services as business needs change. With multi- tenancy and massive scalability, the economics of the Cloud are simply compelling. In my own experience in Unirisx, we have reduced administration costs by 30%- 50% typically. In summary, Takaful demand will further increase through Mutuality and Microinsurance; adoption of the Cloud will enable Takaful operators to satisfy that demand with competitive, innovative prod- ucts which are distributed and administered at cost levels that have never previously been feasible.


2011 February Global Islamic Finance 13


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