Global market for Islamic insurance to touch $7.4bn

The global market for Islamic insurance – or takaful – is to grow by up to 20 per cent annually to reach $7.4 billion (Dh27bn) by 2015, a conference heard on Tuesday.
However, the rapid growth will come from a low base as the insurance industry, both conventional and Shariah-compliant, is under-developed in the Middle East and North Africa (Mena) region, said Nasser Al Shaali, CEO of Dubai International Financial Centre (DIFC).

“The DIFC is focused on the development of products and services to improve the financial instruments already available within the region,” he told the third annual World Takaful Conference in Dubai.

“In the GCC there are some 23 takaful companies compared to 278 conventional insurance firms. This is a sector that will experience real growth in the future and provides an opportunity for the DIFC to position itself as a market leader.

“Our objective is to provide a full range of Islamic products and services that offer similar benefits to conventional financial products whilst adhering strictly to Shariah principles.”

He said providers of takaful needed a good corporate governance framework.

“Adapting and implementing corporate governance codes and principles will enable the takaful industry to access the financial markets, offer better performance and company valuations and allow insurers to help develop the market and grow by protecting the rights of stakeholders and investment account holders.

“The growth of the takaful business in the coming years is promising. Demand is growing as a result of strong demographics, sustained economic growth and the increase in public awareness of takaful products, coupled with more efficient and diversified distribution channels that will provide greater access to a larger segment of the population.”

Al Shaali highlighted the emergence of takaful as an important component of the Islamic financial sector.

“This year’s conference is discussing the expansion of Islamic insurance in international markets and the discussions are relevant as experts have predicted a takaful boom in 2008,” he said.

But the sector faced a number of obstacles to its growth, said Syed Moheeb bin Syed Kamarulzama, president and CEO of Malaysia-based Takaful Ikhlas.

“A key challenge confronting the industry is the shortage of talent,” he said. “Rapid development of the takaful industry demands an adequate supply of competent human capital to drive innovation to sustain competition and raise the performance of the takaful industry to greater heights.

“Takaful operators are constantly in search of high levels of expertise in all relevant areas of management, including technical, distribution, underwriting and investment.”

He stressed the need for concerted and collaborative efforts by all companies in the industry to develop structured human development programmes at all levels, including leaders, technical personnel and regulators.

Kamarulzama also voiced the need for what he described as operational harmonisation and global support systems. “Global alliances are crucial to sustain the current pace of growth in this new industry. The takaful industry needs to present itself as a united front with a common voice in operational and Shariah matters.

“Although minor differences are needed to propel innovation and creativity, major differences in operational practices and Shariah application would cause unnecessary confusion for consumers.”

He said the formation of the Global Takaful Group (GTG), which will meet in Dubai tomorrow, will serve as the best platform to enhance greater mutual co-operation and foster connections among operators globally.

“The GTG aims to be a tangible vehicle of co-operation among operators internationally and will provide a conduit for the exchange of information on all facets of takaful operations among the members.

“Currently there are more than 26 member companies of the GTG and it is our hope that more operators from all over the world will join this group.

“I urge all takaful operators to leverage on this group as an official platform for greater interaction and collaboration, not only among the players but also with other stakeholders such as the regulators, governments and the public at large.”

Kamarulzama highlighted the need for joint efforts to shape prudential rules for takaful. “The setting up of the Islamic Financial Services Board (IFSB) remains one of the landmark developments in this decade.

The board provides the platform for co-operation among the regulators through meetings, conference and the setting up of working groups that give opportunity for the regulators to discuss and exchange information on issues confronting Islamic finance.”

Kamarulzama said five major trends in the global takaful industry over the past few years were significant indicators of the development of the industry. The first of these was growth.

“The takaful and re-takaful industry continues to show rapid growth momentum and is increasingly recognised as one of the major components of the overall Islamic financial system,” he said.

“Global takaful contributions amounted to more than $2bn in 2007 and are expected to exceed $7bn by 2015,” he said. “The past few years have seen growth rates of about 20 per cent, indicating high growth potential in years to come due to the present low rate of takaful market penetration.”
The second major trend was the growing international consensus on the need to have a strategic direction for an orderly development of the global Islamic finance industry, he said.

With a more orderly development of Islamic financial services – including takaful – a more comprehensive Islamic financial system would evolve in more jurisdictions. The number of takaful operators, which currently stood at more than 110, is set to increase.

The third trend was the dramatic growth of the global sukuk market, which could potentially become a key support factor for the strong growth of the takaful and re-takaful industry.

“Sukuks are increasingly becoming an important investment avenue for the takaful industry. The global sukuk market, denominated in international currencies, is estimated to have exceeded $80bn in 2007.

Although the size of the market is modest by global standards, the sukuk market is experiencing remarkable growth, increasing at an average rate of growth of 40 per cent annually.”

The fourth trend was the increase in outsourcing as competitive elements and strong demand for takaful required players to constantly search for ways of achieving greater efficiency.

“There is potential for experienced Islamic insurance players to leverage on their competitive strengths and become allies of other players, especially in a new market, by becoming either outsourcing partners or white label providers.”

The last major trend, said Kamarulzama, was the growing participation of major conventional global players in the takaful and re-takaful industry. There were increasing alliances and collaborative efforts between local and foreign players, which had resulted in the licensing of new operators and joint ventures.

Delegates discussed ways to consolidate the takaful industry and considered the need to strengthen the legal framework for the financial services industry in view of the powerful forces of change continually affecting the global economy and the global financial system.

Conference participants said Shariah was a vital pillar in the sustainable development of Islamic finance and takaful. It provided the legislative framework that defined the conduct of Islamic financial institutions.

It also gave protection to the consumers of Islamic finance, ensured the enforceability of Islamic financial contracts and provided an effective mechanism for legal redress.

In addition, the development of an efficient and vibrant Islamic financial market was becoming critical to the development of Islamic finance, including takaful.

The demand for Islamic financial products and instruments was expanding at increasingly significant rates and the rapid growth of the Islamic financial markets had seen the development of a wide range of products, including money, debt and capital market instruments. So Islamic financial markets were becoming more important for the effective management of investment portfolios and for the diversification of risks.

Annual growth rate to remain at 20 per cent

Ernst & Young released its World Takaful Report 2008 at the conference. The company predicted that takaful contributions in the global insurance industry will rise to more than $4.3 billion (Dh15.75bn) in 2010, and that takaful will maintain its current annual growth rate of 20 per cent.

The report said the Gulf has become the heart of the global takaful market with accepted contributions in excess of $1bn compared to the total global contributions of $2bn in 2006. The report said growth in the takaful sector has outpaced that in conventional insurance sectors in most countries of the Middle East.

General takaful, which includes property and miscellaneous accident takaful, currently accounts for approximately 50 per cent of written business globally and in the region.

“The drivers of takaful demand include high economic growth and increase in per capita gross domestic product (GDP), a youthful population, increasing awareness, a greater desire for Shariah-compliant offerings and increasing asset-based, Shariah-compliant financing,” it said.

Noor Ur Rahman Abid, managing partner at Ernst & Young, said: “It is clear there are significant growth opportunities for the takaful industry, especially when the estimated global insurance premiums are as high as $3.7 trillion.

“Most Organisation of Islamic Conference countries have underdeveloped insurance sectors. Premiums in the Middle East are at one per cent of nominal gross domestic product compared to eight per cent in North America. In addition, high levels of market liquidity and rising income levels in the region should contribute to a future rise in the global takaful industry.”