Takaful gif


According to the report, Saudi Arabia, with contributions totalling US $2.9 billion in 2008, and Malaysia with US $900 million, are the top two Takaful markets in the world. Sudan is the most significant market outside of the Gulf Cooperation Council (GCC) and South East Asia, with contributions totalling US $280 million in 2008.


The global compound annual growth rate for Takaful for the period 2005 - 2008 was 39 per cent; the Levant region and Africa grew at 18 per cent, the Indian Subcontinent at 135 per cent, South East Asia at 28 per cent and the GCC at 45 per cent. The report re- vealed that the United Arab Emirates (UAE) was the fastest growing Takaful market in the world, with a compound annual growth rate of 135 per cent from 2005 to 2008, while Indonesia rose quickest in South East Asia at 35 per cent.


Abdi said, “Globally, performance has been mixed. Yields realised by GCC operators have been comparably high but volatile, while Ma- laysian operators have posted stable returns driven by better underwriting results. In terms of operating efficiency, average com- bined ratios of GCC firms have continued to improve and reached 72 per cent in 2009 (latest year for which data is available), indi- cating improving operational efficiency.


The figures seem to indicate that while the industry may seem to be temporarily bogged down by market troughs, the long term out- look seems very positive.” The report showed that compulsory medical insurance require- ments in Saudi Arabia have contributed to growth in both family and medical Takaful; together, these are estimated to bring in 49 per cent of gross contributions in the MENA region.


Family Takaful is estimated to provide only five per cent of these total contributions. South East Asia is the most highlyutilised family and medical Takaful market bringing in 73 per cent of net contributions in 2008. Contributions from family Takaful in this market are much higher, and accounted for 73 per cent of net contributions in Malaysia in 2008. Both family and medical Takaful continue to grow strongly, with the MENA re- gion following the growth trends witnessed in South East Asia.


According to Ernst & Young, comparatively high rates of real GDP growth and decreas- ing government safety nets, coupled with low popularity of insurance and favourable demographics, suggest strong future growth in the MENA region. While industry growth remains strong, the challenge for operators is to balance profitability through their early years of development. Unsurprisingly, the re- port showed that the primary challenge for


the Takaful industry remains the shortage of skilled professionals across all key functions - underwriting, risk management, claims management and technology deployment. According to Ernst & Young, underwriting losses remain a major source of worry for most operators - and specialisation could be the answer. An enhanced understanding of the customers, sectors and geographies could yield quick results for operators by im- proving their risk analysis and pricing.


Abdi said, “It’s worth noting that most Taka- ful operators are yet to achieve critical busi- ness volume, despite incurring substantial establishment costs over the years. Most Takaful firms are startups or small players with limited access to quality business. It’s important that they rethink their go-to-mar- ket approach if they want to achieve critical mass and become sustainable in the long run.


A lot of priority should be given to controlling operational costs. For example, outsourc- ing arrangement for back-office operations can make a sizeable difference in creating leaner and more efficient operations”. Ac- cording to Abdi, distressed asset values and challenging capital markets are some of the other main challenges that the industry faces in relation to the impact of the global financial crisis.


“The road ahead offers strong business growth, but the real challenge is growth with profitability,” said Abdi. This problem lies in the backdrop of the basic underwriting ca- pacity available to many of the Takaful oper- ators, the impact of which has been exacer- bated due to heavy losses on the investment portfolio. The report also draws attention to the Islamic governance system.


The role of strategy boards will become in- creasingly decisive in steering companies towards recovery. As a result, many opera- tors have initiated a rigorous review of their strategies and financial plans. Capital gener- ated internally through profitable operating performance will be critical to the continued maintainance of financial stability and fund- ing growth.


“It’s about time that the industry lobbies for deeper local Islamic capital markets and diversifies its business mix in favour of ar- eas with sustainable growth potential,” Abdi said. “Locally in GCC, we expect some con- solidations across several markets over the next three years, leading to the creation of financially stronger market leaders. “For in- ternational conventional insurers pursuing a growth agenda in emerging markets of Middle East, North Africa and Asia, Takaful model has certainly been of interest. Suc- cessful investment for these companies lies


in clearly understanding the local market practices and correspondingly choosing the right Takaful model, mode of market entry and local partners.” (CPI Financial). Retaka- ful is integral to the development and con- tinuing growth of the Takaful industry.


The lack of rated Retakaful operations is rated by the Ernst & Young World Takaful Report as one of the key risks of 2009 (at number 8 in the top 10). Whilst this risk does not feature as highly as say, lack of hu- man resource expertise or high risk invest- ment portfolios, it is a clear area of concern for the continuing development of the Taka- ful industry.


Despite the regular commentary on the need for more Retakaful capacity, there re- main relatively few operators in the Middle Eastern Retakaful market. Regionally es- tablished Takaful entities include: Best Re in Tunisia; Takaful Re, operating from the Dubai International Financial Centre (DIFC); the Dubai Islamic Insurance and Reinsur- ance Company in the UAE; Hannover Retaka- ful and ACR Retakaful MEA, established in Bahrain; the Islamic Takaful and Retakaful Company in Saudi Arabia; Al Fajer Retaka- ful Insurance Co, based in Kuwait; and the Amin Reinsurance Company in Iran.


Swiss Re also has provision to serve Mid- dle Eastern markets through a Retakaful window. New players are entering the mar- ket. Indeed, towards the end of last year the Zurich Group announced its intention to es- tablish a Retakaful entity in the DIFC for the purpose of offering family Takaful products. But there does appear to be a far greater concentrations of Retakaful operators with- in Asia (including operators such as ACR Retakaful SEA Berhad, Asean Re-Takaful In- ternational, Labuan Re, Malaysia Re, MNRB Retakaful Berhad, Munich Re Retakaful, PT Reassuransi International Indonesia, and Tokio Marine Nichido Retakaful).


Outside of the Middle East and Asia, one should look to Sudan for Retakaful opera- tions. Furthermore, it has recently been re- ported in the Middle East Insurance Review this month that Africa Re, a Nigeria based reinsurer, has announced plans to start an Islamic Insurance subsidiary. The focus of the propsed Africa Retakaful would be Af- rican countries with a strong Muslim pres- ence, such as Libya, Sudan and Tunisia, but it could also seek business from the Middle East (Clyde & Co).


Takaful and Retakaful Maintaining Mo- mentum in 2010 The Takaful and Retakaful sector has main- tained momentum in 2010, as many Taka- ful companies, especially in the Middle East and Malaysia, continued to provide unprec-


2011 February Global Islamic Finance 15


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