Takaful’s rapid expansion in the early days, particularly in mature markets from Bahrain to Malaysia, seems to be decelerating. Reports have put the growth of Islamic insurance at 7.6% in 2013, against 16% in 2012.
Moreover, the introduction of takaful products has failed to meet expectations in many countries – even those with Muslim majorities – to significantly lift insurance penetration. In the GCC, the rate hovers at around 1% while Indonesia is faring slightly better at just 2%. The problem could be due in no small part to a lack of awareness and differentiation, as to many consumers, takaful is still very similar to conventional insurance.
Still, Islamic insurance is seen in many quarters as a pot of gold. London is vying to become the next hub for Islamic finance and looking to boost its role in the takaful industry with a new Islamic Insurance Association aimed at engaging global markets. Other markets such as Oman, Tunisia and Morocco are getting into the game with new or draft laws to regulate the sector, even as more players join the fray.
As important as scale is for takaful operators, it will be ideal if newer players could learn from the experience of the more established operators and start distinguishing themselves and creating niches, sooner rather than later.
In 2013 – the most recent year in which results are available – takaful growth fell into single-digit range for the first time, to 7%. While this could just be a sign of moderation, it is noteworthy that family takaful contributions, which make up around 18% of the overall life market in Bahrain, plunged nearly 20% between 2012 and 2013, data from the Central Bank of Bahrain (CBB) has shown.
Market observers have said that while takaful has helped increase awareness and sales at least on the family side, it has not led to any dramatic demand. General takaful has performed better, with contributions increasing 15% and forming 26% of the overall non-life pie, up slightly from 22% in 2012.
Takaful contributions as a whole make up 22% or BHD57.2 million (US$151.1 million) of total gross premiums in Bahrain’s domestic insurance market, which is served by seven takaful and two retakaful firms. A further nine players are licensed to operate outside of the kingdom.
On the regulatory side, Bahrain looks set to further strengthen its takaful rules under a new framework released by the CBB which came into force early this year.
Announcing this at the Middle East Insurance Forum in February, Mr Abdul Rahman Al-Baker, CBB’s Executive Director of Financial Institutions Supervision, said that the objective of modifying the rules is to facilitate faster growth of the business while protecting the interests of all stakeholders. Mr Al Baker also said that the changes “will attract new entrants to the market and foster competition for the betterment of consumers”.
The work of revising the existing takaful model is “one of these initiatives in reaffirming Bahrain as the jurisdiction of choice for all the takaful/ retakaful companies globally”, he added.
The regulations, which came after consulting industry players, have stronger protection for customers and stricter solvency requirements at their core.
A law requiring conventional insurers to spin off their takaful windows to become full-fledged players is widely expected to bring about consolidation. However, this is unlikely to happen soon as the law, which came into force last October, gives insurers up to 10 years to comply.
Windows dominate Indonesia’s Islamic insurance market – there were 39 such players compared to five full-fledged operators as of June 2013, according to data from Financial Services Authority (OJK).
Most firms are likely to meet the spin-off requirement as late as possible and they will first expand their Shariah units to ensure they are big enough to be spun off easily, Ms Susandarini, Partner at law firm Susandarini & Partners was quoted by Reuters as saying.
Takaful windows are also trying to grow their contributions to support the higher operating costs when they are spun off, which Mr Abdul Mulki, Head of Shariah business for PT Ansuransi Bangun Askrida told Reuters could triple.
Indonesia has Southeast Asia’s second-largest takaful market after Malaysia, with its huge Muslim demographic seen as a key growth factor. But despite this and the sheer number of players, insurance penetration remains at around 2% due to very low awareness levels.
Malaysia – Time for differentiation
This year marks the 30th anniversary of Malaysia’s first takaful operator, Syarikat Takaful Malaysia. Besides having the most established takaful industry, the market is also unique in that it has a thriving conventional insurance environment. It therefore has the longest history of takaful competing with conventional insurance.
However, the sector’s growth in the last couple of years seems to be slowing down on both the family and general sides, apparently due to competition brought about by the slew of licences issued in recent years. Malaysia’s 12 takaful players must now devote themselves to differentiation from conventional insurance. It has been argued that apart from the potential of participants receiving a surplus distribution, the takaful consumer’s experience is not very different from their conventional peers.
Oman – A step closer to takaful law
Legislation regulating Oman’s fledgling takaful market has moved a step closer to being finalised after the State Council, the upper house, approved a draft law to help encourage new investment in the sector.
The State Council approved the draft Takaful Insurance Law in mid-February; it must now be approved by the Sultan to become law. The legislation, which was drafted by the regulator, the Capital Market Authority (CMA), is expected to fuel the development of Oman’s Islamic financial sector, according to Mr Salim Al Ghattami, Head of the State Council’s Economic Committee.
“Many nationals who follow Islamic regulations and provisions in their transactions are asking the government to regulate the insurance sector according to Islamic concepts,” Mr Al Ghattami was quoted by local media as saying.
The draft law includes 58 classified subjects in eight chapters, and includes oversight and reporting requirements, product standards and liquidity levels. It requires takaful operators to be listed on the stock exchange and have a minimum capital of OMR10 million (US$26 million), in line with the requirements for conventional insurers. The draft law also states that only dedicated takaful firms may operate in the Omani market, thus ruling out the possibility of window operations.
Oman currently has two takaful players – Al Madina Takaful, which converted from a conventional insurer in January 2014, and Takaful Oman Insurance, which was officially launched last June.
Pakistan – Windows open
Following the regulatory green light last year allowing conventional players to open window operations, the Securities & Exchange Commission of Pakistan (SECP) has issued four such licences to EFU Life Assurance, Jubilee General Insurance, SPI Insurance and United Insurance.
Other companies such as Asia Insurance and IGI Life Insurance are reportedly making similar plans. Jubilee Life is also considering entering the family takaful market through a window operation. SECP reportedly expects to see 20 to 25 new takaful window operators this year.
With two full-fledged family operators and three full-fledged general providers, Pakistan’s takaful sector is more than 10 years old, with the first player – Pak-Kuwait Takaful – set up in 2003. However, it has yet to make headway in improving insurance penetration, which stands at just 1% of GDP.
Saudi Arabia – Market on the mend
Saudi Arabia, the largest Islamic insurance market, has rebounded strongly following the corrective measures of 2013, which saw many companies reporting huge losses. Rates – including those for medical and motor – have since improved with more actuarial involvement in line with regulatory requirements, and price competition has eased to a large extent. Premiums grew 20% to US$8 billion in 2014.
Not all problems have been solved – results published on Tadawul showed that 12 operators reported losses in 2014, while at least five companies have lost more than half their capital. However, market solvency has improved with at least five companies getting the green light from the Capital Market Authority to increase their capitalisation.
The market remains highly competitive, with 35 licensed insurers and reinsurers in 2014. The top five insurers contribute over 60% of market premiums.
UAE – Market revamp
The UAE insurance market is currently being overhauled with the application of comprehensive regulations to both conventional insurers and takaful operators.
Issued by the Insurance Authority (IA) earlier this year, the rules concerning solvency and capital adequacy are seen as paving the way for consolidation. Already, according to Director General Ebrahim Al Zaabi, several Islamic insurers are seeking guidance from the regulator on mergers and acquisitions.
Talks are still at an early stage, Mr Al Zaabi was quoted by Reuters as saying. There are around 60 insurers in the market, of which 10 are takaful providers.
Mr Al Zaabi was also reported as saying that a committee to oversee takaful would be established by the end of this year to monitor companies and their products.
The UAE’s takaful market is estimated to have grown 18-20% last year. However, the sector is extremely competitive, with most operators focussing on health and motor insurance to go to market quickly. In these segments, “takaful firms offer no unique value proposition, so they are fighting (conventional insurers) for the same market share”, said Mr Safder Jaffer, Managing Director and Consulting Actuary at Milliman at a recent conference.