Takaful represents a largely untapped opportunity, especially in South-East Asia. Malaysia has long been at the forefront of the developments in the industry and is providing a model for development elsewhere in the region. However, there are fundamental issues that the takaful industry needs to address if it is to become both profitable and sustainable. In particular, the number of operators and consequent lack of economies of scale to push down the price of takaful products has impeded development in many markets.
According to the Ernst & Young World Takaful Report 2012 the Takaful market (excluding Iran) is worth US$10 billion. The biggest contributions are from the Saudi co-operative model and the bulk of the value is in the GCC. However, South East Asia contributes around 24% of the market (with a value of US$2 billion) whilst other jurisdictions (of which Sudan is the main contributor) account for around 8% of the market.
Growth rates of around 20% are projected over the coming years and, in any case, by the end of 2012, the global takaful market may well be worth around US$12 billion (excluding Iran - although Iran itself is likely to be conducting around US$17 billion worth of takaful business by the end of 2012).
There are a number of markets with clear potential for growth in the takaful market including East Africa, China, India, Malaysia and Indonesia. China, for example, has 80 million Muslims and India between 80-100 million Muslims, which both represent huge potential markets. However, despite the clear opportunities there are challenges in growing takaful markets in these countries not least a lack of awareness or knowledge of takaful. Even in some of the leading takaful markets this remains an issue. For example, it is understood that around 70% of Malaysians and 95% of Indonesians have little or no knowledge of takaful.
There is a diverse and varied approach to takaful regulation worldwide. Although there are attempts towards standardisation through organisations such as the Audit and Accounting Organisation for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB), the different regulatory models that exist do allow some form of diversification. There was a suggestion at the Asia Insurance Review Takaful Conference ("Conference") that the solvency of the contributors (shareholders) should be reviewed from a solvency and compliance point of view and that protection for participants and shareholders should be similar.
Most speakers noted that the industry must continue to be transparent and should follow the best regulatory and compliance practices currently deployed in the insurance sector. The takaful industry, in any case, will have to adapt to take account of Solvency II and IAIS implementation to ensure general compliance with insurance regulators in the jurisdictions in which it operates.
Notwithstanding the requirement to develop, innovate and expand the takaful industry, regulators need to be robust. Malaysia was held up as a beacon as the Bank Negara Malaysia is very sophisticated in its regulation of takaful and it was noted Malaysia had also introduced a risk-based capital framework for takaful companies in January 2012.
One discussion surrounded liability of directors and Shar'ia board members. The question was: who should be liable to the participants / shareholders: the Shar'ia board or the board of directors? A number of different questions were posed, such as, whether the Shar'ia board should be subject to regulations and external compliance similar to that to which a board of directors is subject. The resounding answer appeared to be, yes. In any case, it was suggested that Shar'ia boards should have to disclose any rulings/resolutions in respect of all (re) takaful products.
Management of risk
Under takaful operations, there is invariably a conflict of interests between shareholders' interests and policy holders' interests. The IFSB recommends the establishment of an independent governance committee similar to that established for the "with profits" business in the UK. Such a governance committee ensures that there is clear and complete communication as to how the takaful fund is being managed to both participants and shareholders. The board of directors must ensure that they align participants ' and takaful operators' interests, which can prove difficult. Invariably, for example, Qard needs to be provided on a regular basis, which means there is a high risk of unappropriated losses. Qard, being a Qard Hasasan interest-free loan provided by the operator to make up the deficit of a distressed takaful fund.
Finally, speakers encouraged retakaful to be used (as opposed to the continuing dependence on the conventional reinsurance market) and it was emphasised that this is the right approach for mitigating risk and such considerations should be included in the assessment of any risk appetite.
A number of challenges are facing the takaful market. The takaful model has continuing issues with its balance sheet. There is a risk of decreasing competition and, therefore, increasing price as start-ups without the appropriate backing are consumed by bigger takaful businesses or fail for lack of capital. Furthermore, takaful has yet to reach the economies of scale of conventional insurance which affect growth ability and profitability. Lack of economies of scale and too much competition resulting from many small scale operators was an often repeated complaint throughout the Conference.
Global economic volatility has affected the global takaful market negatively, although it has also created some opportunities. To date, the main impact has been a decrease by 25% in investment in takaful operations which has a knock on effect of increasing prices. This has the effect that individuals who may buy a takaful product choose conventional insurance as conventional insurance is traditionally cheaper.
There are also problems with capacity in certain lines of business, or more particularly lines of business that are Shar'ia compliant, which is one of the challenges identified in respect of retakaful. However, it was suggested that the lack of capacity in the market for either takaful or retakaful is not necessarily an issue but the lack of capacity at the right price is the major issue, which has in turn resulted in leakage from Shar'ia compliant products to conventional products, especially at the retakaful level.
It was suggested by a number of speakers at the Conference that takaful should develop certain types of coverage and reduce the level of security provided to its participants. Furthermore, in order to make takaful operators competitive the operators need to lower the upfront rates as far as possible. This can be done by pooling takaful operators' funds, which allows for both risk sharing and expertise sharing and boosting solidarity between (re)takaful operators.
The takaful industry must look for alternative distribution strategies, for example, takaful operators should allow customers to be able to buy takaful by credit card and/or over the internet and develop the takaful brand in this way. Takaful operators should also look to embrace mass marketing – using call centres/ mobile phones etc and promote affinity schemes such as "mosqueassurance", distributing takaful products through mosques.
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