International takaful (Islamic insurance) market could be worth $7.7bn by 2012: Ernst & Young
Takaful is the great success story of this region’s insurance industry, but will it ever catch on in the West, and are its Gulf prospects truly long-term?
From Manama to Malaysia, takaful, or Islamic insurance, is on the rise.While still a relatively immature industry, takaful is looking to ride on the back of the explosive growth of Islamic finance in the Arab world, and increase its share in the global insurance market.
Global accountancy firm Ernst & Young predict that the international takaful market could be worth $7.7bn by 2012, up from a mere $1.4bn in 2004. Last October, the world’s second largest reinsurer Swiss Re said in a report that takaful grew 25 percent a year from 2004 to 2007, while the conventional insurance market posted low double digit growth at 10 percent in the same period.
Half of the market will go Takaful. It could be as high as that; up to 50 percent in five years.Like all Islamic financial products, takaful has to adhere to the strict principles of Sharia law. Income derived from interest is forbidden, along with revenue derived from prohibited activities or trade such as gambling, pornography, and alcohol. Takaful in Arabic means joint guarantee and it works on the basis that a group of people agree to share risk by putting money into investment funds, sometimes through a charitable donation, and then draw on these funds when there is damage or loss to a party.
"There is tremendous opportunity because it [insurance] is very underserved – insurance as a whole is very underpenetrated [in the Gulf], says Dinesh Chandiramani, director of distribution in equity and credit sales at Dubai-based investment bank Arqaam Capital.
"People are looking at decent growth for the sector of around 15 to 20 percent on an annualised basis because there is a nascent market right now which is in the process of being built up. It could grow significantly beyond that if the product is well-received and people start to buy into it," he continues.
Nick Frei, chief executive of Bahraini Islamic insurer t’azur predicts that takaful could have a 50 percent market share in the Gulf’s insurance sector by 2014.
"I firmly believe half of the market will go takaful. It could be as high as that; up to 50 percent in five years" says Frei.
But the rise of takaful has not been plane sailing. It still only makes up a fraction of the global insurance market and the sector’s growth has been hamstrung by a dearth of takaful reinsurers. Some are emerging, such as the Dubai-based Takaful Re, but generally there are too few companies to underwrite the risks of the smaller takaful players.
Therefore, many takaful companies go down the conventional route when it comes to reinsurance, and because of the lack of options available to the industry, it usually comes with Sharia scholars’ approval.
Currently, Malaysia, the world largest Islamic financial centre, is the market leader in takaful. It is home to some of the biggest Islamic operators in the world such as Takaful Malaysia, which aims to capture over half of the market share of the industry in under three years-despite the economic gloom. In comments made by the group’s managing director Datuk Hassan earlier in the month, the industry is worth RM12bn ($3.65bn), with his company’s current share at $1.13bn.
In conventional insurance, risk is sold at a price depending on age, background and financial status, introducing a largely commercial aspect. In takaful, transactions that are deemed to be uncertain are banned.For example, a Western insurance broker will sell risk, such as home insurance, not knowing whether there will be claim on the house.
In the West, insurance companies may invest in ventures which make their money from interest or in sectors that are forbidden by Islam.