Judging by the growth rates that takaful has witnessed in the past decade, it's fair to say that the segment has definitely managed to overcome the resistance of many Muslims to insurance, and to life insurance in particular. Takaful is also benefitting from factors that support insurance growth throughout the GCC region, including strong economic growth, which has led to rising incomes. People are now more aware of the importance of both life and general coverage as they take out mortgages to buy property, seek to ensure a comfortable retirement and provide for the education of their children.
However, the latest data show a deceleration in growth rates. Although the GCC market remains at the top in terms of contributions, the pace of growth is slowing, achieving less phenomenal rates than it witnessed in the past seven years. With growth rates falling from averages of 25% to 12%, as it was the case in Saudi Arabia, the global takaful industry could slow to single-digit growth in the near future, industry analysis suggests.
This slowdown makes it more challenging for takaful operators to maintain momentum while boosting profitability. They are faced with the need to rethink strategies and take proactive steps to overcome diverse challenges in order to sustain growth momentum.
Awareness Remains a Key Issue
There continues to be some confusion and lack of knowledge about the takaful operating models and product features as well as the differentiation between takaful and conventional insurance. The lack of awareness in certain markets is adversely affecting the growth of takaful, family takaful in particular, as many Muslims remain reticent about the concept of life protection.
A survey of takaful participants' perceptions in Saudi Arabia unveiled at the International Takaful Summit showed that respondents had a limited knowledge and awareness about the principles of takaful products. This implies that pertinent information about the products was not explained to customers properly.
To raise the awareness of takaful and to promote full transparency, education is extremely important for consumers to be in a better position to select insurance or takaful products that best meet their needs as well as to understand their rights and responsibilities as consumers.
Hence, finding the right value proposition for takaful, especially in markets with well-established conventional players as well as raising takaful awareness amongst individual consumers remain the major challenges.
The Right Offering for the Right Customer
One way of differentiation is through product innovation, where simple and transparent products that address the specific needs of takaful customers would go some way to increasing its visibility. Lines of business where this can be realised are in long-term savings products that can be tailored for the evolving needs of the largely young and challenging GCC population with increasing awareness levels and education about financial protection.
A consumer survey conducted by Dr. Hashem Abdullah AlNemer in Saudi Arabia also showed that "participants have high preferences which reflect their need and wants, as customer preference is an individual realization of a need."
Takaful operators have surely realized that one size doesn't fit all as far as product development is concerned. The emergence of new customer segments, with higher levels of awareness, require innovative approaches in targeting them, by addressing their specific needs and preferences as well as building better customer relationships through effective communication tools, such as customer profiling, continuous updates and timely reporting.
Products built around customers, such as bundled protection coverage - examples are travel insurance with additional protection for travel; credit life insurance to insure repayment of loans; and women's illness plans covering specific diseases like breast cancer - are emerging and increasingly becoming popular. Other tailored products are being introduced include women's plans and affluent plans with individualized protection including critical illness cover, travel cover and children's protection.
The underpenetrated life insurance market in the GCC has an immense growth potential for family takaful products. The segment is witnessing stable growth with the increasing awareness of financial planning and protection needs. The GCC family takaful share is still insignificant at 5% of total contributions, but studies show that it is undeniably the line of growth for the future.
According to a 2011 Alpen Capital report on the GCC insurance sector, life insurance in the GCC will witness a significant growth driven by increasing per capita income and favorable demographics. The life market is expected to see tremendous growth as companies develop a wider range of products and better distribution channels. This will make the market increasingly attractive for insurance companies and offers customers the prospect of products that are tailored more precisely to their needs and delivered with a higher standard of service.
There are plenty of opportunities for takaful operators to explore as the family takaful segment, pensions, and wealth management solutions are still underdeveloped, especially in the investment-linked and annuities product categories. Other business lines such as corporate and SME also remain underdeveloped although major opportunities exist for takaful companies to work hand in hand with Islamic banks in the area of project financing. Special attention is also needed to develop micro takaful solutions.
Channel and Pricing Management
It's evident that product development is a key growth driver for takaful, but even with the best products around, it's crucial to have effective and efficient distribution channels that will ensure that these products reach the right customers.
Bancatakaful has been gaining ground in the GCC, and has been leading the distribution of takaful products, particularly family takaful offerings that are embedded within wealth management. However, takaful products have still to compete for shelf space with other bank products including conventional bancassurance products. Extensive efforts are still needed to develop product delivery applications designed to enhance customer convenience and overall service quality.
Pricing too remains a challenge. In certain markets where pricing is not dictated by the regulator, commission arbitrage comes into play. So pricing is important because takaful providers gain market share by pricing their products competitively or offering special deals. Of course, that can be beneficial only for a limited period, because at the end of the day it will have an impact on the takaful operator's bottom line.
In an increasingly competitive market, many industry leaders are embracing innovative tools to deepen existing relationships and improve new customer acquisition rates, realizing that efficiency can be achieved through investment in systems and operational and service infrastructure.
Successful distribution models in a number of Islamic countries have rapidly identified that call centers, direct sales team, internet and mobile phone services can offer distinct advantages to elements of the sale process, over a personal-contact-only strategy. This is particularly apparent as the needs of wealth management and financial planning become more widespread throughout all customer segments.
Improving Depth of Islamic Financial Markets
A key challenge for takaful operators remains the lack of suitable Shariah-compliant investment options, especially as the takaful sector's growth rates and profitability are under pressure, the need for investment products with yields higher than cash is increasing.
The Shariah-compliant investment universe is slowly evolving and has expanded away from equity to new asset classes, including Islamic money market, commodities, real estate and alternative investments. There also has been significant growth in sukuk funds as investors become more sophisticated in their asset-allocation decisions, and search for higher returns.
Consequently, assets of sukuk mutual funds based in the Gulf grew to more than USD 500 million, a 31% increase in one year, according to Reuters calculations based on data from fund companies.
The Gulf sukuk market is reviving and issuance is thought to be set for an upward trend. USD 6 billion of sukuk were sold across the GCC in the first three months of 2012, compared to USD 7.3 billion issued in the whole of 2011, according to Emirates NBD data. While sukuk have been issued mainly by the public sector, private companies have begun to issue Islamic bonds, including the USD 400 million sukuk announced in January by Majid Al Futtaim Holding, based in Dubai.
The increasing popularity of sukuk funds is also prompting major GCC banks, such as National Bank of Abu Dhabi, HSBC, Al Hilal Bank and Rasmala Investment Bank, to launch their own sukuk funds.
Shortage of Human Capital and Technical Expertise
The lack of human resources dedicated to takaful is one of the major weaknesses of the industry. The backgrounds of underwriting, accounting and marketing staff are in conventional insurance. A shortage of Shariah competence also causes setbacks for the takaful industry. It is therefore of paramount importance that the talent pool of trained personnel available to takaful operators grows, including the number of non-Muslim insurance personnel knowledgeable about takaful operations.
The industry has often been criticized for spending too little on training and education. People selling takaful products hardly know the real benefits and differentiating features of takaful versus conventional products. A number of GCC operators have realized this shortage and started investing in education and awareness initiatives.
Conducive Regulation a Key Driver
Most GCC regulators have been and continue to be proactive in developing frameworks to regulate the takaful industry.
In the UAE, the Insurance Regulatory Authority issued a circular in September 2011 to all insurance and takaful companies setting out guiding rules that they should adhere to for their bancassurance business. The Saudi Arabian Monetary Authority directed all operators to align with the cooperative insurance model by the end of 2011. Takaful operators had to adjust their internal accounting structures, remove the use of Wakala and Qard and amend product terms and conditions. This shift away from the pure takaful model may have various effects on the industry, especially because Saudi Arabia is the largest takaful market in the world.
Oman's Capital Market Authority is reviewing an application from the first takaful operator, Al Madina Gulf Insurance, but the market might take time to pick up, as only fully fledged takaful companies will be allowed to offer Shariah-compliant products; Islamic windows for conventional insurance companies are not permitted in the sultanate. The CMA is also in the process of finalizing the regulations and standards required for takaful operations.
While the new regulations are seen a positive development, the increased variances in regulatory regimes across jurisdictions could make it difficult for takaful operators to function across regions and also lead to confusion for customers and multinational insurers.
The takaful industry remains fragmented with no critical mass and no regional or international cross-border takaful provider with meaningful distribution. However, the recent political developments in the MENA region, triggered by the so called Arab Spring, are thought to have created a favorable environment for Islamic finance in general and unlimited opportunities for GCC operators to export their expertise and enter new high-potential markets such as Egypt, Morocco, Libya and Tunisia.
Takaful has entered a maturing stage of development, and the focus is no longer on its potential but on how to convert the potential into real growth and then sustain the momentum.
Takaful operators are realizing that, although the segment is demand driven, in order to achieve scale they need to reach out to the untapped potential by defining the takaful market in a broader sense: that anybody in need of insurance or financial protection is a customer, making it an alternative value proposition to the conventional approach. Takaful has also immense potential in the currently underserved lines of business such as group life, SME and corporate.
The sector still faces a key challenge in improving efficiency and transparency, achieving greater standardization and operational excellence. Financial performance also remains a key issue for many takaful operators as the market remains fragmented, with an increasing number of small local players competing against established conventional providers.
The market needs restructuring as it matures in order for takaful operators to benefit from economies of scale and large distribution networks.