The takaful insurance industry has seen remarkable growth over the past five years. Global takaful contributions grew by 31% in 2009 to reach $7bn, and by the end of 2011 the market was thought to have a value of $12bn, according to Ernst & Young.
Analysts are keen to put this growth in context; after all, this is still a niche market. Swiss Re's Malaysia-based head of retakaful, Marcel Papp, points out "growth is always easier when the base is low and for takaful the base is very low". But, caution accepted, the numbers are impressive and, while the global economic turmoil took its toll on the conventional market, takaful has continued to see growth.
"Every year we have been anticipating a slowdown but, with conventional insurance seeing negative or single-digit growth, takaful insurers have maintained almost 20% growth," comments Ayman Alajmi, regional head of takaful and managing director Bahrain for Chartis Takaful Enya.
The low insurance penetration in this region is certainly a contributing factor as insurers do not have to canablise the conventional market. In addition, many have entered the market in joint ventures with the region's Islamic banks.
As E&Y's Islamic Financial Services leader Ashar Nazim explains, this is a significant advantage. "For takaful operators, distribution through Islamic banks allows easy access to a captive market who will only deal in Sharia-compliant insurance solutions. As the size and value of Islamic banking assets has grown in number and value, so has the attractiveness of this channel," he said.
But, despite the positive signs, the takaful market is still challenging. One concern for the multinational carriers that operate in the region is the dim view regulators are beginning to take of companies that peddle a little Sharia-compliant insurance on the side, from the same outfit that dispenses conventional insurance products.
"Previously ‘takaful windows' were permitted allowing a single entity to offer both conventional and Islamic insurance products. However, increasingly such arrangements are prohibited, as is the case in the United Arab Emirates where it is necessary to establish and capitalise a separate entity in order to offer takaful products," explains Peter Hodgins, partner at Clyde and Co.
"All eyes are now on Qatar, which last year banned similar windows in the banking sector."
However, some regions are introducing regulatory changes that actually permit companies to open windows. The Securities and Exchange Commission of Pakistan has recently issued draft takaful rules that allow conventional insurers to open takaful window operations, prompted by a desire to improve insurance penetration in the predominately Islamic region.
If Qatar did ban takaful windows and other countries in the region followed suit this would create a compliance issue for multinationals in the region. Mohammad Khan, UK Islamic financial leader at PwC, believes firms entering the market should seriously consider capitalising a separate company to mitigate the risks, but not all companies can, or want to, raise the capital for a separate entity.
Although Chartis' is one company considering taking a change of direction to concentrate on commercial lines reinsurance and become a fully-fledged retakaful company. "There is considerable opportunity for Retakaful insurers to support the growth of Takaful business. This is an area that we at Chartis Enya will look to address, particularly in respect of supporting commercial lines takaful business," comments Alajmi.
The sheer number of players operating, particularly in the UAE, is also a challenge. Competition ranked as the highest risk for most industry readers surveyed by E&Y for its World Takaful Report 2011. As Nazim explains: "The number of operators coming online in the last five years has led to significant downward pressure on pricing."
While most agree the Middle East's direct takaful market is "overcrowded" not everyone believes this is a cause for concern.
"In personal lines there are a lot of players," says Khan. "We will see consolidation within Kuwait, Qatar and some UAE territories such as Dubai and Abu Dhabi, but I expect the players that emerge from this to be stronger."
When it comes to specialised risks, there are far fewer players and much less capacity. Chartis offers takaful directors and officers and takaful professional indemnity, but it is believed to be one of only three companies that offer such products.
A third, and somewhat surprising problem given the sector's rapid growth, is that of public awareness. In a risk survey last year Swiss Re asked muslims whether they felt they had good knowledge of or bought takaful. Only 30% of muslim respondents in Malaysia said they had bought takaful, or had good knowledge of it. Only 5% of respondents in Indonesia said they did.
Papp believes educating the distribution channel is a key part of overcoming this gap, but accepts that it will take some time. There has been a traditional ambivalence to insurance in these countries and, although this is changing with the help of government initiatives, it will not happen overnight.
If the takaful market continues to grow, some have suggested that it could target territories beyond the Islam-dominated Middle East and South East Asia.
However, if takaful operators were to expand into geographical regions with higher penetration rates some of their current advantages would dissipate. They would be attempting to cannibalise the traditional market and would have to battle for business. But some believe this is a battle they could win.
"Takaful has an added appeal for non-Muslims with its positioning as being more ethical and a fairer means of insuring against risk," Nazim says.
It would be naïve to suppose that for most consumers ethical sensibilities are a stronger driver than their purse, but where price differences are negligible those desires may be given consideration.
"If I'm looking at an ethical motor product versus a non-ethical product they will be about the same price. On those grounds the ethical product seems the obvious choice," comments Khan.
If takaful vendors can convince the public of this, demand is likely to grow. But whether the financial results will be enough to maintain the interest of global carriers that have entered the market seeking "a slice of the pie" remains to be seen.
There is a ban on excessive profits in takaful, according to Khan, but there is nothing in inherent in the takaful structure that means it would generate less profit.
"What would make a takaful company unprofitable is the same thing that would make a conventional insurer unprofitable: not charging an adequate premium for the risk."