Global takaful contributions are forecast to reach $12 billion by the end of 2012, after expanding by an annual average growth rate of 19 percent in the past two years.
Takaful is an Islamic insurance concept, which is grounded in Islamic muamalat (Islamic banking), observing the rules and regulations of Islamic law, otherwise known as Shari’ah.
There are an estimated 230 takaful companies and another takaful re-insurer with an estimated $11 billion in volume.
Saudi Arabia is reportedly the largest market for Islamic insurance, with gross contribution amounting to $500 million.
Other key markets are Malaysia, Qatar, Kuwait, United Arab Emirates (UAE), and Pakistan.
According to the prestigious Ernst & Young, Malaysia and UAE achieved growth rates of over 24 percent.
“The challenge was once again, maintaining growth with profitability in the current economic climate. There were positive developments in the Gulf Cooperation Council (GCC) with more operators showing profitability than previous years,” Ernst & Young said, in its World Takaful Report 2012.
The Saudi Cooperatives continued their growth performance yet still struggled in generating shareholder returns, it added.
The members of the GCC are Saudi Arabia, Kuwait, Bahrain, Qatar, UAE, and the Sultanate of Oman.
It was founded on May 1981, with the aim of collectively promoting coordination between member states in all fields in order to achieve unity.
The report said however that the return on equity for the takaful industry was lower than conventional counterparts, both in the GCC as well as in Malaysia.
A significant contributing factor to the lower ROE was the lower investment returns for the industry relative to returns yielded by conventional insurers.
“The industry has now obtained significant market share versus conventional insurance in most GCC countries as well as Southeast Asian markets. There are a number of drivers behind this growth but one that is becoming increasingly important is regulatory support through appropriate amendments in legislature to provide a level playing field with conventional insurance companies,” the annual report said.
In Southeast Asia, the key players are found in Malaysia, Brunei and Indonesia. The three nations account fro gross written contributions (GWC) worth roughly $2 billion of the total contributions.
In fact, the subregion is expected to expand dramatically as the Saudi regulators disallowed the pure takaful model.
“The primary hub for takaful may well shift from GCC to Southeast Asia,” the report stated.
The key business lines in the major markets are family and medical, marine and aviation, property and accident, and motor.
On the average, family and medical accounted for 48 percent of total, followed by motor, property and accident, and marine and aviation.
The Indian sub-continent registered the largest family and medical market share with 76 percent of total business lines.
In the case of Iran, majority of takaful insurance coverage were motor while family and medical accounted for just a quarter of the total.
Meanwhile, the annual report mentioned Muslim population centers worldwide with huge potentials for both Islamic finance and takaful.
These include Egypt, Pakistan, India, Indonesia, Bangladesh, Nigeria, Algeria, Morocco, Turkey, CIS Region, China, and Russia.
According to Ernst & Young, conventional insurance accepts premiums from the insured at a level, which it anticipates will cover claims and result in a profit.
Takaful is based on the concept of social solidarity, cooperation and mutual indemnification.
It is a pact among a group that agrees to donate contributions to a fund that is used to jointly indemnify covered losses incurred by the members.
While the concept of takaful revolves around mutuality and is founded on non-commercial basis, a takaful operator runs the operations and the fund on a commercial basis.
The five key elements of takaful are mutual guarantee, ownership of the fund, elimination of uncertainty, management of the takaful fund, and investment conditions.