In many ways, Takaful represents the ideal spirit of Islam, where the Ummah joins together in cooperation and mutual help. With Islamic finance firmly established across the Middle East and further afield, Robin Wigglesworth reports on an industry poised for global expansion
It is said that the concept of Islamic insurance, or Takaful, first appeared in the early second century of the Islamic era, when Muslim Arabs expanded their trade routes across South East Asia. The dangers of seafaring were many, and based on the Islamic principles of mutual assistance and cooperation among the Ummah, or community, the sailors all contributed to a fund, which would compensate anyone who suffered losses through mishaps or accidents.
Modern Takaful first emerged in two very different forms, and in two very different places. In the 1970s, Sudan embarked on an Islamisation programme, and developed a Takaful system based on the Waqala model. Here the Takaful operator works as an agent of the policy holder, called 'participant' in Takaful, and merely takes a fee for his services in managing the company. In the 1980s, Takaful emerged as part of Malaysia's pioneering of Islamic finance, and was based on the Mudarabah model, where any profits are mutually shared between the Takaful operator and the participants, along predefined lines and divisions.
However, the watershed moment for Takaful was the 1985 Fiqh Academy ruling that traditional insurance was Haram, forbidden, but insurance based collective security and cooperative principles was Halal, permissible. Now, over 20 years later, the combination of a regulatory overhaul and the exponential growth of Islamic banking and finance means that the industry is finally coming of age and Muslim countries are ripe for a Takaful revolution.
Standard & Poor's, the world's largest ratings agency, defines the basic insurance model as follows: "An insurance transaction is where the financial risk of an event occurring is transferred by the owner of that risk (the policyholder) to a third party (the insurer) for a fee (the premium). The policyholder gains comfort or certainty of cost and restitution from the incidence of a loss event. The insurer accumulates a portfolio of risks, for which the fees are received. The portfolio's diversity provides some measure of risk mitigation if and when a loss occurs, whereupon accumulated funds are used to reimburse policyholders." At face value, little seems to be un-Islamic about insurance, other than the policyholders being called 'participants' to reflect the joint pooling system of Takaful. The main difference between traditional insurance and Takaful is the adherence to three Shari'ah principles: Avoiding uncertainty (Gharar), gambling (Maisir) and interest (Riba).
However, uncertainty is a relative value inherent in any transaction, and few insurance companies, famously risk-averse, would ever consider their activities gambling. A key element of the insurance business model is that the insured will not be better off should the policy be better off in the event of an insurance settlement, obviating any element of gambling.
Interest was previously the catch that hindered the growth of Takaful, but the proliferation of Islamic funds and investment vehicles has made it possible for Takaful operators to invest in non-interest divesting areas.
Chakib Abouzaid, the CEO of Takaful Re, an Islamic reinsurance subsidiary of ARIG, says that the growth of Islamic finance has been the main factor in the growth of the industry, coupled with the "new Islamic 'wake-up', or the emergence of strict religious practices".
The reform of regulatory and legal bodies has also played an important role in the rise of Takaful. As the regulator of a leading financial hub, the Bahrain Monetary Agency (BMA) has been at the vanguard of change, and was the first country to standardise and regulate the practice of Takaful through a framework that takes into account the special nature of the Takaful model and the unique relationship between participants and shareholders. To this end, the BMA regulations take into consideration the high level of control, segregation of shareholder and participant funds, capital adequacy and solvency, and the valuation of assets and liabilities that are special to Takaful. The Saudi Arabian Monetary Agency (SAMA) has noted the efforts of the BMA and the subsequent strength of the Takaful industry in Bahrain, and has introduced its own reforms, whilst Dr. Abdalelah Saaty, the chairman of the Insurance Committee at the Jeddah Chamber of Commerce and Industry, has campaigned for the establishment of a dedicated insurance and Takaful authority in Saudi Arabia.
Total Takaful premiums are expected to reach $7.4 billion by 2015, and Takaful has become one of the impressive performers of the financial sector, boasting growth rates varying from 10% to 30% across the Asian, Arab and African regions. In 1993, direct Takaful premiums only amounted to $30 million, but are estimated at around $2 billion in 2005, and the graphs are only pointing upwards. The past few years have seen Takaful companies spring up in countries as diverse as Australia, Egypt, Kuwait, Lebanon, Nigeria, Pakistan, Sri Lanka, South Africa, Tunisia and the UAE.
Kevin Willis, the director of Financial Services at Standard & Poor's, sees little that would prevent S&P from rating Takaful companies as well. Wilson says that many of the Takaful principles mirror those of traditional Mutuals, where everyone takes part in association by sharing the risk.
However, Willis voices concerns over the practicability of Takaful in certain cases, saying that whilst Takaful offers good solutions to low value, high volume risk-type solutions, the sharing mechanism suggests that Takaful "is more of a problem where you have very high values at risk, for example insuring an oil production facility. The concept of sharing risk is much more difficult at that very high value of risk level, but at personal and low level commercial risk, Takaful is a practical solution if there is a significant Islamic motivation to go for it". He warns, however, that an overly strong emphasis on the Islamic aspect would do more harm than good, and said the big test for Takaful would be whether it offered value for money to customers compared to conventional insurers, irrespective of the religious imperative.
Bahrain-based Solidarity claims that this is precisely what Takaful does. Under the Waqala Takaful system, the participants own the Takaful funds that are managed by the Takaful operator themselves, and all surpluses from the fund are therefore dispersed among the participants. As Robert King, general manager of Family Takaful at Solidarity, points out, under the conventional insurance model, "the surplus goes to the shareholders of the insurance company". Furthermore, whilst the religious scrutiny from the Shari'ah board restricts the operational flexibility of a Takaful company, it also acts as an extra safeguard of corporate governance.
Solidarity announced in December a joint venture with Malaysia Assurance Alliance (MAA), one of the largest insurers in Malaysia, to offer Solidarity's Takaful products in Malaysia.
According to industry experts, Malaysia is a key market for Takaful, not only because of the established history of Takaful there, but also the high level of awareness of both insurance and Islam. Salama is also eyeing the Malaysian market, and has already been active there through their Best Re subsidiary. According to Dr. Malaikah, Salama has applied for a Takaful license from the Central Bank of Malaysia, and expects to start operations soon.
In the UAE, Takaful companies in 2003 had a combined market share of 3%, amounting to around $29 million of insurance premiums. In 2002, Dubai Islamic Bank (DIB) teamed up with other financial institutions and issued an IPO for a new Takaful operator, Dubai Islamic Insurance and Reinsurance Company (AMAN). AMAN offers Takaful to the customers of DIB, and underlining the tremendous recent growth of Takaful and good deal flow, it recently posted an 865% rise in net profits in 2005, to $22.3 million, and a 134% growth in assets to $66.9 million. To capitalise on this, the board has recommended the company increase its capital to $54.4 million. To tighten its grip on the UAE market, AMAN has signed agreements with Emirates Islamic Bank (EIB) to offer EIB mortgage customers a mortgage protection policy, Abu Dhabi Commercial Bank (ADCB) to offer Takaful under the umbrella of ADCB Meethaq Islamic Financial Solutions, and is also in talks with Sharjah Islamic Bank.
Though a decent Takaful market at the moment, the Emirates is not where the future lies for Takaful companies with global ambitions. Salama is also a leading UAE institution, yet its Chairman Sheikh Khaled bin Zayed bin Saqr Al Nehayan points out that whilst there are still opportunities within the life and medical Takaful areas in the UAE, the market is fairly mature. "The Emirates is not one of the most lucrative markets due to the competition, so we are not that eager to expand dramatically," said Sheikh Khaled.
On the other hand, most industry experts agree that Saudi Arabia offers superb potential for Takaful. In 2003, Saudi Arabia had one of the lowest insurance penetration rates in the world at 0.5%, and insurance density showed that per capita spending on insurance was a mere $45.5 per capita, compared to $1621 in Singapore. This is probably a direct consequence of the predominant view that traditional insurance is considered Haram in Salafi Saudi Arabia, making the Kingdom a vastly attractive market for Takaful. However, the regulatory body still seems to need a little work, with some people claiming that the new Co-operative Insurance Law doesn't distinguish sufficiently between conventional and Islamic insurance operators. Also, any new entrants to the market have to navigate a jungle of different authorities to get a license - involving not only the SAMA, but also the Insurance Council, the Ministry of Commerce & Industry, the Saudi Arabian General Investment Corporation and even the Traffic Department.
There are already 22 Takaful operators in Saudi Arabia, but Salama is one of many foreign companies that have applied for and received licenses to operate in the Kingdom. Salama is no stranger to the Saudi market, having operated there through its Bahrain subsidiary. Sheikh Khaled says Saudi Arabia, as the largest economy of the GCC, will be a premier market for Salama, with a targeted market share of at least 5%. Salama recently concluded a successful IPO with 200 million shares, raising $204 million to fund their regional expansion plan and pay off debts incurred from the acquisition of subsidiaries. Their ambitious plans have been preliminarily vindicated by provisional 2005 profits of $29.9 million, up from nearly $1 million in 2004, and 70% more than estimated at the time of the July 2005 IPO.
In the long run, Europe might prove an equally profitable market for Takaful, with millions of wealthy and increasingly aware Muslims scattered across the European Union. Sameer Al Wazzan, general manager of General Takaful at Solidarity, says that in addition to "looking closely" at Morocco, Yemen, Iran, Pakistan, the Far East and the European Union, Solidarity is particularly interested in the 2.8 million Muslims in the UK.
"To exploit the potential of the UK, we are developing customised Takaful products that meet the UK's regulatory requirements. The UK currently lacks an international-standard Takaful provider, and we expect to enter this market during 2006, initially working with other banks and financial institutions that have existing Islamic branches there, and later, based on the performance analysis, establishing independent representative offices," said Al Wazzan. On 1 January, Salama established the first Shari'ah syndicate at Lloyds, with an initial underwriting capacity of $72 million, and according to Dr. Malaikah, have plans to enter other western markets, such as the US, Canada and Western Europe "in the near future".
The Takaful market has been hindered by the lack of large Re-Takaful companies. Like traditional insurers, all Takaful companies need to reinsure themselves against crippling claims, but no Re-Takaful company has been large enough to take on this role, and there are not be enough around to share the risk of insuring all the burgeoning Takaful companies. As Kevin says, 'the lack of Re-Takaful companies will become an issue as Takaful develops and reinforces its business model. Re-Takaful works, but the Re-Takaful industry is at risk should the Takaful companies do poorly." Shari'ah compliance boards have given a dispensation as long as there are no large enough Re-Takaful companies, but have made it clear that this should not be a permanent solution. Salama hopes that the acquisition of Tunisia-based subsidiary BEST Re, the largest and only credit-rated Islamic reinsurance company in the world, will be able to take up this mantle. With this in view, it has invested nearly $50 million of the proceeds of the recent IPO to increase BEST Re's capital, and established a Re-Takaful company in Saudi Arabia, with $27.2 million in paid up capital, which will also float later this year.
Among the Re-Takaful companies, Bahrain-based Takaful Re stands out from the crowd by being listed on the DIFC, a clear advantage for a reinsurance operator. In addition, it is owned by ARIG, one of the largest insurance operators in the GCC, and can draw on its extensive experience from the Gulf. Abouzaid says that whilst Re-Takaful is a "relatively new concept", the dearth of sizeable Shari'ah compliant reinsurance companies, in particular ones regulated rigorously by the DFSA, means that "there is huge potential in the Re-Takaful industry, as companies continue to use the conventional options in view of the inadequate Re-Takaful operators". To this end, Takaful Re is offering its services across the MENA region, as well as Brunei, Malaysia and Indonesia.
The tremendous potential of Takaful is not lost on GCC banks either. National Commercial Bank (NCB) has announced that it will introduce Banctakaful and offer it in its branches, and other banks are expected to follow hot on their heels. However, with such an under-developed market, it is doubtful whether the dedicated Takaful companies face any true competition from banks, with Al Wazzan dismissing concerns by saying that "competition is always good".
In fact, Abouzaid maintains that, with Middle East average insurance penetration at just 2%, compared to 8% worldwide, there are in fact more opportunities for Islamic banks and Takaful companies going "hand-in-hand in enhancing the potential of the Takaful markets," than competing. "Banctakaful is a very positive trend and will be an important contributor in the growth of the Takaful industry." AMAN's strong links to parts of the UAE banking sector would seem to confirm this trend.
Perhaps the premier indication of Takaful's viability is the interest of the large multi-national insurers. Swiss Re is rumoured to be looking into Takaful and Re-Takaful companies, and in the Lloyd's insurance market there is a Re-Takaful syndicate being set up for 2006. It is still relatively small, but it will offer a solution to the so-far modest problem of the Islamic insurance market.
There are still obstacles to surmount. As Dr. Malaikah says, "there has been no insurance culture in the Islamic world, so there is a huge need to educate people about the benefits of Takaful. This not only applies to potential customers but also to regulators".
Takaful-friendly regulation also needs to be developed. Compared to the huge strides in Islamic banking, the Takaful industry lags behind, and regulatory bodies need to be astute and swift to catch up with the demand for Takaful products.
Chief among the issues that need to be resolved is the problem that the varying models of Takaful pose, such as the differences between the original Waqala and Mudarabah concepts. Yet the 1985 Fiqh Academy ruling might contain the solution. The ruling states that a cooperative model is acceptable, and the aforementioned Cooperative Insurance Law in Saudi Arabia follows this model. Al Wazzan, amongst others, feels that this might be the future rather than the other incompatible models. "If the cooperative model is Shari'ah compliant, then perhaps the Takaful industry should adopt this as the universal model?"
© Banker Middle East 2006
