April 18, 2012 / 11:01 AM / 7 years ago

Analysis - Slower takaful growth prompts strategy rethink

DUBAI (Reuters) - Growth of the takaful or Islamic insurance business is slowing, industry statistics show, increasing pressure on the sector to boost efficiency, roll out new products and explore new markets.

Takaful, which has its core markets in the Gulf and southeast Asia, is one bellwether of consumer appetite for Islamic finance. But profitability has been hit by fierce competition and rapid growth of workforces at takaful providers in past years.

“A key strategy is to scale up family takaful,” Shyam Sankar, regional head of insurance sales through bank channels at Bahrain-based Medgulf Allianz Takaful, told Reuters.

The industry’s big challenges include building product awareness and making consumers realise the importance of saving over the long term, he added.

An alternative to conventional insurance, takaful is based on the concept of mutuality; the takaful company oversees a pool of funds contributed by all policy holders, but does not necessarily bear risk itself. In their investments, takaful firms must follow religious guidelines, including bans on interest and pure monetary speculation, and a prohibition on investing in industries such as alcohol and gambling.

Product categories are similar to conventional insurance, however, with family coverage, equivalent to life insurance, and general coverage, equivalent to property insurance, accounting for most business.

The market opportunity is significant, according to a report last year by Swiss RE; conventional insurance accounts for 83.1 percent of all premiums written in Muslim countries, it estimated.


Growth of takaful contributions in Saudi Arabia, which provides about half of the total, slowed to 12 percent in 2010, the most recent year for which data is available, from a compound annual growth rate of 38 percent during 2005-2009, a report by consultants Ernst & Young said this week.

Meanwhile growth in Bahrain and Malaysia, regarded as the most well-developed takaful markets, is also showing signs of flagging, though it still outpaces conventional insurance.

The most recent data from the central bank of Bahrain shows takaful premiums grew 20 percent in 2010, far from the 70 percent increase in 2008. Total assets expanded 12 percent in 2010 against 52 percent in 2007.

Bahrain is a major industry hub - the country was the first to deploy regulation specifically designed for takaful, and it has established a healthy retakaful market, which allows operators to obtain coverage on existing policies to manage their risks.

But Bahrain’s takaful sector was hit hard by the 2008 global financial crisis, with assets decreasing 35 percent that year, prompting the reorganisation of one of its flagship operators, Solidarity Group. Also, the continuing social unrest in Bahrain casts a shadow over its financial businesses in general.

Malaysia has proved more resilient but has followed a similar trend, according to data from that country’s central bank. Takaful assets grew 18 percent in 2010 against 28 percent in 2007.

The deceleration could be hard to reverse because of shrinking sales force in the industry. The number of employees involved in general takaful sales in Malaysia peaked at 32,997 in 2009, when it soared 107 percent from the previous year; but it contracted 5 percent in 2010, while staffing for the conventional insurance industry fell just 2 percent.

If these patterns continue, the global takaful industry could slow to single-digit growth in coming years. But some operators are determined to tap new markets to prevent this.


Takaful companies are exploring new markets such as Egypt and Jordan; Islamic finance is expected to receive a boost in North Africa from last year’s Arab Spring uprisings, which removed authoritarian governments that discouraged or neglected sharia-compliant business for political reasons.

Bahrain’s Solidarity has moved into Egypt and Jordan. A consortium of Doha-based institutions tapped the Pakistani market by launching Pak-Qatar Takaful in 2006.

Other firms have seen opportunities in markets such as Lebanon, which posted 102 percent growth in takaful contributions during 2010, and Indonesia. A report by actuarial consultants Milliman forecasts strong growth for takaful in southeast Asia, suggesting it could become three times as large as the Middle East by 2015.

Ernst & Young forecasts Saudi Arabia’s share of the global takaful market will drop to 44 percent this year as newer markets grow faster, and the trend of new markets outpacing traditional ones could continue in coming years.

Other companies are focusing on building size in their domestic markets, which could give them economies of scale.

Ghassan Marrouche, chief executive of Takaful Emarat in the United Arab Emirates, said his company was expecting double-digit growth rates in coming years, supported by the launch of several new products including a capital-protected instrument and a “microtakaful” product focused on low-income earners.

“We want to be positioned well in the UAE market before we move outside,” he said. “It is a very dynamic market.”

Editing by Andrew Torchia

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