While Islamic banking and investments are on a solid path to form competitive ecosystems within the global finance industry, that cannot be said for Islamic insurance, or takaful, which is still an underperformer within the sector.
Particularly, the Islamic insurance segment’s breakthrough into the mainstream financial industry hasn’t materialised yet in the way the Islamic banking and investment sector has made it — by embracing large segments formerly solely served by conventional finance and by building up considerable momentum in non-Islamic jurisdictions.
A look at the figures shows that takaful, despite sustained double-digit growth in recent years, remains a small segment in the global insurance industry. While the sector recorded growth in contributions of 12% as per latest available figures in 2015 — compared to conventional insurance premiums which grew by just 4% —, takaful remains a small-volume and fragmented industry with total contributions of just $25bn and only around 300 takaful and retakaful operators and windows worldwide. In comparison, the global volume of life- and non-life insurance (without state health insurance covers) was worth $3.6tn in contributions in 2016, according to figures from Allianz Group, one of world’s largest insurance companies.
“The issue is that the takaful industry faces enormous challenges in achieving growth and building mass coverage globally,” says Hatim El Tahir, director of Deloitte’s Middle East Islamic Finance Group in Bahrain.
“Yet, the growing industry has a number of opportunities to set the stage for both short- and long-term growth and achieve takaful inclusion,” he adds.
According to Deloitte, the challenges are, among others, underdeveloped risk management and internal controls, improvable operational and business excellence, achieving better product governance and strategy, governance and regulatory compliance and a lack of talent building and leadership competence.
“Not every challenge applies to every takaful firm, and there are other challenges not explored herein,” El Tahir says, but adds that “to adapt to these challenges, the industry executives and policy-makers need to address them thoroughly.”
Adding to these issues is that takaful is currently concentrated on just a few world regions. The Gulf Cooperation Council (GCC) countries account for 47% of all takaful contributions and 31% of takaful operators, followed by Middle East and North Africa (Mena) excluding GCC with 33% of contributions and 22% of the operators with the lion’s share being in Iran, Asia with 18% of contributions and 15% of the operators and the small rest in Sub-Saharan African and Western countries.
Growth potential currently comes mainly from the introduction of mandatory medical insurance in some countries, especially Saudi Arabia, which has the largest market for Islamic insurance at a value of $10bn in contributions as 2015, followed closely by Iran with $8bn. Overall, the dominant takaful business lines in the GCC are, besides medical and health takaful, mainly motor and property takaful, while family and life takaful is the main business line in Southeast Asia.
The insurance penetration in most Islamic jurisdictions is rather low, according to a recent study by the Malaysia International Islamic Financial Center. This indicates untapped market potentials, but takaful operators are struggling with product innovation and general outreach to uninsured persons, and are also lacking scale for more efficient operations. Other problems in key markets are challenging economic conditions, complex regulations, as well as compliance and operational challenges.
Analysts recommend that the takaful sector in member countries of the Organisation of Islamic Cooperation should, in a first step, focus more on underserved customer segments and those who are voluntarily excluded due to religious beliefs, and then put more emphasis on new markets with a high share of Muslim population, especially in the Mena and African regions.
Some countries show that government incentives and regulatory initiatives can indeed pave the way for better takaful outreach.
For example, in Oman, where takaful was launched only in 2014, the sector has quickly gained momentum due to smartly designed product lines and now constitutes around 9% of Oman’s insurance industry as per premium income. In Indonesia, a law came into effect in 2014 that requires conventional insurers to transform their Islamic insurance windows into fully-fledged takaful companies which has led to larger market presence.
In Pakistan, the regulator increased takaful penetration by allowing conventional insurers to offer Islamic products to reach out to a wider audience through their large branch network.
Morocco, where takaful regulation was introduced in 2015, operators are also required to be set up as separate companies which has encouraged investors to partake in the industry.
Looking forward, the takaful industry has strong growth drivers behind it, such as an expanding population base in its key markets and a growing awareness of the importance of health insurance. Competition-wise, more mergers and acquisitions are expected especially in Asian markets which would strengthen the capital base and capabilities of merged takaful operators. But, as mentioned, fundamental challenges need to be addressed and structural reforms initiated in order to foster innovation, promote sustainability, improve product choices and value for clients and tackle the talent shortfall in the industry.
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