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May 2024

Are the stars starting to align for takaful?

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Source: Middle East Insurance Review | May 2023

Strong, sustained performance in major takaful markets, an increasing understanding among consumers that the principles of Islamic finance are aligned with many sustainability goals and a large untapped market of young, affluent Muslims could just be the trifecta of growth drivers that the sector needs to maximise its potential.
By Amir Sadiq
For the longest time, despite its oft talked about potential, takaful markets around the world have really only been able to grow modestly. Things are changing, however, and there are signs that the sector could be set for period of strong, sustained growth.
A recent report by IMARC Group highlighted how the global takaful market size reached $30.5bn in 2022 and is expected to reach $54.9bn by 2028, exhibiting a growth rate (CAGR) of 10.2% during 2023-2028.
It said that takaful is rapidly gaining momentum, particularly in the Asia Pacific and the GCC, owing to large Muslim populations - and that Muslims currently account for a fifth of the total global population. These levels are expected to increase in the future.
Some drivers of the sector’s growth drivers include:
  • The majority of the world’s Muslim population are young with 60% of them currently under 25 years of age. With rising affluence levels, this group has the potential to represent a customer base for a fairly long duration if it is captured early.
  • The low penetration rate of conventional insurance in affluent Muslim regions like the GCC, make takaful a potentially powerful tool to raise insurance awareness in these regions.
  • Takaful is still able to make a strong business case for itself among both Muslims and non-Muslims due to ethical investment policies, strong growth prospects and competitive pricing.
Another report by Expert Market Research, which expects the global takaful market to grow (CAGR) 13% during 2023-2028, said that in addition to rising awareness of financial risk among Muslim countries, rising investments towards proper planning and effective strategizing of takaful broking are leading to an expansion of the takaful customer base.
In an op-ed in Middle East Insurance Review’s (MEIR) October issue last year, Fitch Ratings global head of Islamic finance Bashar Al-Natoor said that globally, the takaful sector has the potential to expand by way of cross over to non-Muslim markets, such as by finding commonalities between takaful and other forms of insurance.
“For instance, friendly societies, cooperative, mutual and micro-insurance could be catalysts that help provide takaful markets with a meaningful push into non-Muslim markets,” he said.
GCC growth prospects
In a commentary published in March, Moody’s said that the GCC takaful industry’s growth prospects are favourable, reflecting the region’s buoyant economy.
“The GCC region’s post-pandemic economic rebound, fuelled by rising oil prices and government investment in economic diversification, will drive faster premium growth. Rising prices were a supportive factor in the second half of 2022, particularly in retail lines, where there was steep discounting during the pandemic,” it said.
“However, we expect intense competition to constrain future price increases. Increased demand for health and life insurance, the spread of compulsory insurance coverage, and still low insurance penetration indicate ample scope for future growth.”
Emir MujkicIn an interview published in the January 2023 issue of MEIR, S&P Global Ratings director and lead analyst, insurance ratings Emir Mujkic said that growth prospects of takaful operators in the GCC will also be supported by new mandatory coverage and overall higher insurance demand.
In S&P’s view, higher hydrocarbon prices, with the assumption of an average Brent price of $100 per barrel (/bbl) for the rest of 2022 and $85/bbl in 2023, will fuel accelerated economic growth in the oil-exporting region. This should feed through to the takaful sector where gross written contributions are expected to grow around 10% in 2022 and 5%-10% in 2023.
Malaysia growing steadily
Malaysia is one of the largest takaful markets in the world. According to the Malaysian Takaful Association (MTA), the country’s takaful industry posted a strong growth in 2022 on the back of the country’s post-lockdown recovery.
Family takaful saw a penetration rate of 20.1% last year compared to 18.6% in 2021, based on the number of certificates in force relative to the Malaysian population, reported the news agency Bernama citing an MTA statement.
The family takaful market saw annual takaful contributions of new businesses maintained above the MYR2bn ($451m), posting MYR2.19bn in 2022, marginally lower (1.9%) compared to MYR2.2bn in 2021. Gross contributions of total business in force was MYR8.34bn in 2022 last year, higher than the MYR7.42bn posted in 2021.
General takaful business generated gross direct contributions of MYR4.6bn in 2022, a y-o-y increase of 21.1% over 2021. The MTA expects the takaful industry to maintain its growth momentum in 2023, albeit at a moderate rate.
In February, The Malaysian Reserve, referencing research from AmInvestment Bank, said the country’s takaful industry has continued to grow at a faster rate than conventional insurance, recording a CAGR of 20.6% in 9M2022, outperforming conventional insurance’s CAGR of 10.8%.
Speaking to MEIR earlier this year, Prudential BSN CEO Wan Saifulrizal said the demand for takaful products has been increasing in Malaysia because of the growing awareness of the importance of insurance, especially among Muslims who prefer shariah-compliant financial products.
Indonesia’s positive outlook
Indonesia is another major market for takaful, and prospects for the sector are positive, according to a Fitch Ratings report in January this year. It said the takaful sector’s contribution in Indonesia will grow by 5%-10% in 2023, further supported by the developing Islamic finance ecosystem.
The sector gained market share, at 9% of the insurance market in 11M2022 from 8% in 11M2021, mainly due to a 57% y-o-y increase in contributions from general shariah products. This stems from rising demand for takaful products as the economy recovers, said the report.
This appears to reflect the sentiment among local players. In November last year, Indonesian Sharia Insurance Association associate director Erwin Noekman told local news that the takaful market has grown each year over the past decade, in terms of the number of business actors, assets and premium contributions.
“This historical data gives rise to confidence that in the next few years, the shariah insurance industry will continue to grow,” he said, adding that the growth rate was expected to be in double digits for both assets and contributions.
Takaful’s sustainability appeal
While the various takaful markets and regions might have slightly different factors driving the growth of the sector, one overarching theme seems to be that the sustainability and social responsibility inherent to Islamic finance is proving to be a big draw for both Muslim and non-Muslim customers.
An article on Zawya from August last year quoted CIMB bank group chief sustainability officer Rafe Haneef as saying that there is a growing recognition that the moral precepts of Islam have a lot in common with global standards like the sustainable development goals (SDGs) set out by the UN.
During a 2021 Refinitiv webinar, Mr Haneef said that Islamic banking [has always been] focused on social impact – ensuring that sectors which are socially harmful, such as alcohol, tobacco, arms, ammunition, pornography and gambling, have been excluded.
“In essence, the SDGs are aspirations towards meeting the higher objectives of [Shariah law]: whether that’s eradicating poverty or ensuring the sustainability of life on earth or under the sea. These are all core responsibilities of humans, as dictated in the Quran itself,” he said.
According to Refinitiv, an American-British global provider of financial market data and infrastructure, total Islamic finance assets will grow to nearly $5tn by 2025, up from $2.2tn a decade earlier.
And in December, the Islamic Development Bank brought up how Islamic finance can be a powerful tool in boosting action against the climate crisis. “Addressing the climate emergency will require all the funding possible from as many diverse sources as can be accessed. Islamic climate finance instruments show strong potential to contribute to such efforts across Asia and more broadly,” it said. M 
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