Dynamics of a Takaful Market
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Mahomed Akoob It is recognized by Muslim jurists that the principles of responsibility sharing under the system of aqila (pooling of resources) as practiced among Muslims in Mecca and Medina is the cornerstone of mutual insurance. Islamic communities in the early second century of the Islamic calendar practiced successful schemes of cooperative risk sharing that originated even before the advent of Takaful. Early precursors were developed in response to perils and risks associated with long-distance trade via caravans or sea voyage and included: hilf (confederation), aqila and daman al tarik (surety) that gradually evolved into a system of community self-help and financial assistance. The challenge however was to reform modern day financial institution so that they are in harmony with Shariah principles. The movement of Islamic insurance began in the 1970s when there were edicts issued in favor of an Islamic model for insurance that ultimately led to the establishment of the first Islamic insurance company in Sudan in 1979. The insurance market in Sudan is therefore considered as the pioneer in the Takaful arena. The concept of Takaful in parallel with conventional insurance gained momentum in Malaysia when the Takaful Act 1984 was enacted, followed by the incorporation of Malaysia’s first Takaful company. Since then, we have been seeing the blossoming of Takaful and reTakaful companies all over the world. The market and opportunity The Takaful concept presently presents significant opportunities. The GCC (Gulf Cooperation Council) countries, which comprise Saudi Arabia, Kuwait, Oman, Qatar, Bahrain and the UAE, have a combined population of 36 million of whom 95% are Muslim. With insurance penetration as a percentage of GDP at just 0.9% (versus 2.75% for CEE (Central and Eastern Europe), 8.3% for Europe and 9% in the US), potential growth in this market will be driven by increasing penetration and an expansion of GDP.
The GCC countries are expected to spend more than US$430 billion on infrastructure and a further US$420 billion on property development over the next decade, supported by the buoyant current account surpluses. The favorable economic climate is also reflected in the expansion of the MENA region (Middle East and North Africa) which grew at 22% in 2007 compared with 16% in 2006. Additionally, the Takaful opportunity is not just confined to the GCC region. Asia and Europe both have significant Muslim populations. The Muslim population in Europe is 51 million (or 6.95% of 732 million) whilst in Asia, Muslims make up 26.7% of the population (1.06 billion of 3.97 billion). Besides the high economic growth and increasing GDP per capita, other demand drivers for Takaful include the young population (60% of the global Muslim population is under 25 years old), increasing awareness and a greater desire for Shariah compliant services and increasing asset-based Shariah compliant financing. ReTakaful industry The reTakaful industry plays an important role in providing underwriting capacity, spreading of risk, catastrophe protection and an efficient and cost-effective substitute for capital. The capacity provided by the reTakaful industry allows Takaful operators to underwrite large industrial and mega risks and hence be in a position to compete with established conventional insurers, and at the same time reduce the need to raise huge amounts of capital. ReTakaful is an effective and convenient way of spreading the risk portfolio over different Takaful pools as well as territories. It also reduces the probability of the risk of ruin for the industry when large catastrophe losses, either natural or man-made, occur. There are currently 10 dedicated reTakaful operators and six reTakaful windows in the market. The capital paid up of these companies has exceeded the US$1 billion mark. Current estimates indicate that reTakaful contributions amounted to US$570 million in 2006 and are projected to double by around 2010. Not all of the estimated contributions are absorbed by reTakaful operators as, for historical reasons, many Takaful operators still reinsure their portfolio with conventional reinsurers. The Middle East and Southeast Asia remain the most important markets and the majority of the current Takaful operators are based in these regions. The boom in the Middle East economy brought with it infrastructure, property development and investment on a tremendous scale which stimulated Takaful growth.
Although at this stage the Takaful and reTakaful industry on a global basis is considered small in comparison to conventional insurance and reinsurance, Hannover Re however strongly believes in its future growth potential. Bearing in mind that a quarter of the world’s population adheres to the Islamic faith and that the global Islamic insurance market is still in its infancy, attractive growth prospects and scope for innovative products to serve the needs of customers are foreseen. Hannover Re, as one of major global reinsurance groups, has decided to deploy its expertise in reinsurance for the development of the reTakaful industry by establishing Hannover ReTakaful in Bahrain. Setting up a full-fledged reTakaful company is evidence of the strong commitment of the group to Takaful development. Furthermore, Hannover Re did not want to be a participant that merely rides the momentum without being able to contribute significantly to its development. By so doing, Hannover ReTakaful will be able to boost professionalism into the newly emerging market. Critical factors for the industry Asset management capabilities: It is essential that shareholders’ and policyholders’ funds be invested in Shariah compliant investment instruments. As a custodian of policyholders’ funds, the Takaful operator must ensure that these funds are soundly managed to instill confidence among the increasingly sophisticated public, as well as in terms of delivering returns. The majority of Islamic assets are long term and illiquid. The underdeveloped secondary markets for Islamic financial instruments in most countries result in a lack of depth, liquidity and efficient pricing. Capital requirements: The obligation to provide Qard Hasan (benevolent loan) to the Takaful fund underscores the relevancy of capital, although fundamentally the Takaful operator is not directly assuming the risk exposure. Capitalization, solvency and credit rating therefore need to be robust to support the businesses underwritten. Global standard of reTakaful: The standards for the concept and mechanism of reTakaful need to be further enhanced. It is important for the industry to develop a globally accepted standard mechanism for reTakaful so that the slowing effects arising from the use of different terminologies and interpretation can be eliminated. The standard concept and practice will also address the issue of transparency within the Takaful industry. Hannover ReTakaful is currently making its contribution toward these developments. Building reTakaful pools: To enable the Takaful operators to declare that their entire business mechanisms are Shariah compliant, they have to reinsure with Shariah compliant reinsurers. This reTakaful should operate on the basis of risk sharing via a reTakaful pool that consists of risks being accumulated from the many Takaful pools from various Takaful operators. From a technical and application perspective, it certainly poses some challenges. The reTakaful operators receive risks from different Takaful pools comprising different classes of business and geographical distribution. As a result, a reTakaful operator has to manage a reTakaful pool that is heterogeneous in nature, in terms of risk categories, classes of business, catastrophe exposure and geographical scope. This leads to the question of whether the reTakaful operator should maintain a single pool for all the businesses or segregate the pools according to certain conditions, such as classes of business, geographical distribution or type of the reTakaful. Furthermore, the choice of model and its applicability to reTakaful operators underwriting business on a global basis needs further consideration, as does the interpretation of the law of necessity. Human resources: Experienced and talented human capital in the Middle East insurance industry is in short supply. The situation is more pronounced in the Takaful and reTakaful industry that requires experienced insurance personnel with Shariah knowledge. The development of human resources is urgent and needs special attention to ensure sound performance of the industry. Organizations such as the Bahrain Institute of Banking and Finance (BIBF) are playing a role in this field in general and also in particular by introducing accredited Takaful programs. Adequate pricing: The issue of risk-commensurate pricing applies equally to the conventional and Takaful businesses for long-term sustainability. It is however perhaps more pronounced in the Takaful arena as the Takaful operator is managing the risk on behalf of the policyholders. The Takaful operator therefore has to be vigilant to ensure sound pricing and risk selection so as to ensure a healthy policyholder fund. Clearly, there are challenges and opportunities for the industry. The Takaful sector will also have to manage the competition from the traditional insurance sector. Overall, the sector is expected to grow rapidly and carve a niche in the global market.
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