Takaful, the Shariah-compliant form of insurance, holds tremendous potential but continues to be challenged by multiple factors such as a limited product range, non-competitive pricing and a supportive regulatory framework, especially in the Middle East, according to participants of a roundtable discussion organized by Zawya in partnership with Emirates NBD and FWU Group.
In spite of a high growth rate in demand for such products in the UAE, for instance, takaful remains a small segment of the insurance pie. In 2011, the overall UAE insurance market grew by 10%, whereas the takaful segment is expected to have grown by 30%. Takaful remains a very small segment of the market, at about 7.5%, it was revealed at the roundtable, moderated by Zawya Dow Jones macroeconomic reporter Leila Hatoum.
"I've seen a growing awareness about takaful as a business," said Parvaiz Siddiq, chief executive of UAE-based Noor Takaful. "Takaful companies have been more successful in selling to individuals than to the corporate sector."
One of the primary challenges to takaful's growth remains the issue of product innovation and differentiation. Most takaful providers offer "investment products with an insurance wrapper", instead of creating innovative products that play to takaful's strengths, according to Geert Bossuyt, managing director and chief executive of Dar Al Istithmar.
"I acknowledge that takaful is a young industry, but it has still been focusing on short-term products like motor insurance. Long-term products, with the exception of the investment-wrapped products, have not yet been developed," Bossuyt said.
Sohail Jaffer, deputy CEO of FWU Global Takaful Solutions, added: "Product innovation is definitely a challenge. But I think they have made considerable strides I would say in the last three to five years, particularly in Malaysia, where the takaful business has a very strong leadership both in terms of market and product excellence. In the GCC, the Saudi and UAE markets have done the same."
Pricing too remains a contentious issue, according to the roundtable participants. Safder Jaffer, managing director and consulting actuary for the Middle East and Africa at Milliman, said "extremely high" commission rates, often going up to 200%, were not sustainable and "kills the value" for policyholders.
"Players are compelled to increase commissions because they can't sell their products. If the commissions issue is not addressed, we are going to see erosion in policyholders' reasonable expectation. That is dangerous," Jaffer said.
Shekhar Krishnamurthy, head of retail assets and liabilities, consumer banking and wealth management at Emirates NBD, agreed that pricing was an issue, and pointed to the absence of large volumes as one of the reasons.
"It's a classic price-revenue equation," Krishnamurthy said. "If you are able to really blow up the volume dramatically ... then I think that is a story to build on in providing better pricing."
The role played by government regulation was also discussed. Comparisons were made with the support given to the takaful industry by the regulator in Malaysia, for instance.
"The regulator's main objective is to protect investors and ensure financial stability and I think there has to be a policy direction from the government," said Hatim El-Tahir, director of Deloitte & Touche's Islamic Finance Knowledge Centre, Bahrain. "They could nurture the industry through different ways and awareness programs."
Other issues discussed at the roundtable include the importance of training takaful teams; finding talented resources; implementing effective distribution solutions; public awareness of takaful and its benefits; and the availability of Shariah-compliant investment options for takaful providers.
Read the full report: Opportunities and challenges in the Middle East takaful industry
© Zawya 2012
