To make a meaningful impact on the protection gaps across the Islamic world, takaful operators should march towards the digital revolution, says Mr Lukas Mueller of Swiss Re.
Together with microinsurance, takaful represents a much-needed paradigm shift in the way we approach the protection gap. The main characteristic of this shift is the way insurance has actively addressed the social context in which its participants operate. In microinsurance, we have attacked the problem of seemingly uninsurable low-income sectors of the community by utilising highly efficient distribution and administrative models to deliver affordable products that can be delivered to very large numbers of people – often backed by public-private partnerships.
In takaful, we have attacked the problem of the ethical issues of the conventional business by creating a viable model of insurance that provides a solution for concerns on interest, speculation and shariah-compliant behaviour, for example.
Yet, despite the potential for change, it is clear we have not yet come far enough in the social relevance of takaful – or in making takaful operations as streamlined and profitable as possible. For this reason, we need to call for the next development in the takaful journey – the step into the digital takaful company.
We need to launch the ‘techaful’ revolution.
We have a solid basis. The takaful market has grown. Estimates of market size vary significantly due to different definitions of takaful. But in general, S&P and other sources tend to converge on estimated contributions of around $12bn in 2017, when combining wakala, wakala-waqf, mudarabah and Saudi Arabia’s cooperative models in the Middle East. In August 2017, S&P reported listed takaful players in the GCC reporting pre-tax net income of $683m in 2016, a substantial increase from $274m in 2015.
So at a financial level, takaful is working – the foundation has been laid, and we are clearly moving on from the promising first steps. But what will take it to the next level? How can we take the next step to make a meaningful impact on the protection gaps across the Islamic world? Why are we not more aggressively combining the tech tools with the mindset of takaful? Why is takaful not seen as the cutting edge of insurance across our region?
Insurance used to be a game of slow incremental innovation. But that’s in the past. We are driving change at an impressive pace. The adoption of new consumer solutions around telematics are revolutionising motor insurance. Health monitoring, wearables and incentive programmes are revolutionising the life side of our business. Mobile distribution channels and parametric insurance have driven surprisingly rapid innovation in an industry known for its stoic conversation.
It’s all about vision – and it is all about context.
So what does ‘techaful’ really look like?
A truly leading techaful set up would be a highly digitised, highly efficient, strongly consumer-focused way of providing financial protection and closing protection gaps. At the back-end, companies would be deploying data analytics to strategically steer their portfolio management, understand their accumulation risks and find new opportunities in the market. Their claims, policy and accounting process would be running on efficient platforms. Customers would be engaging with their insurers – whether to purchase, claim or receive add-on services – via attractive online and digital platforms.
The techaful company of the future is not a static entity. It can evolve its product range quickly as it also responds to new tech developments and consumer behaviours around emerging areas such as smart homes, cyber risks and telematics. It looks like something that real consumers would want to use and the business takes place in a way that connects to the way people conduct the business of running their lives.
A techaful participant can tap their smart phone on the side of the road and get assistance for that accident. It means allowing them the option of using that same smart phone to collect data on their good driving and reducing their premiums. They can open an app at the doctor’s and get their medical bill approved and paid.
There are also ‘takaful-specific’ ideas such as the app where the customers can see their annual surplus in real-time. The participant could then immediately decide what to do with the surplus, eg, buying top-up cover; paying part of the contribution for the next period; and donation to charity.
It would be employing parametric solutions so that people can be reimbursed or compensated automatically when planes are late, flood waters rise or when they need to buy electricity because bad weather has reduced the amount of power their solar panels are generating.
And, perhaps most importantly, the techaful approach can also be used to increase the ‘community’ spirit among the participants by informing them about activities within the community. This takes the takaful concept of an active participant to the next level, and actually enables them to participate in the risk and data landscape that is all part of managing risk.
This is visionary stuff. And it is all possible. In fact, we can do this now – it’s just that we are not doing enough of it.
But how is all this relevant to takaful?
It is fair to say that there is nothing particularly ‘Islamic’ about the ideas above. So why is takaful any different to the conventional insurance world? Why should takaful innovate?
To answer this question, I think we need to be really tough on ourselves. Takaful has the potential to close protection gaps – but it is not doing that at the rate we might have hoped. In fact, the May 2018 A.M. Best market report on takaful in the MENA region described both the competitive situation of takaful operators and their impact on insurance take up as ‘disappointing’.
Takaful has grown and the Malaysian success story simply cannot be ignored. But, with the exception of Saudi Arabia, there are few markets where shariah-compliant insurance has really staked a claim to be the dominant insurance model, or where it has significantly impacted on the protection gaps.
Conventional insurance still dominates, and in many areas so do the conventional practices that have not yet enabled us to fully close protection gaps. It would be fair to say that it’s not that we’re not doing a good job – it’s just that we could be doing so much better.
Tech is not a panacea – just as takaful was not a panacea. But tech seems to be the missing piece of a takaful conversation that is currently more focused on regulation, and the technicalities of fund models and fee structures.
Perhaps then, combining takaful’s inherent appeal to ethical sensibilities with a product offering that appeals to a modern, mobile, digital consumer would seem to have the type of synergies that could just move the needle and help us realise the full potential of what is a very exciting way of doing business in our context. M
Mr Lukas Mueller is head of Middle East at Swiss Re.