New measures for regional Takaful growth

More than 250 key regulators and industry decision-makers came together for to map strategies at the Middle East Takaful Forum.

New measures for regional Takaful growth

New measures for regional Takaful growth

“The global Takaful industry has continued to demonstrate a strong growth momentum, and increasingly being recognized as one of the major components of the Islamic financial system,” Abdul Rahman Al Baker, Executive Director of Financial Institutions Supervision at the Central Bank of Bahrain , said in his opening address for the 2nd annual Middle East Takaful Forum (METF) held in Bahrain.

Convened under the patronage of the Central Bank of Bahrain , the 2nd edition of the forum at the Gulf Hotel in the Kingdom of Bahrain brought together more than 250 senior decision-makers from over 100 organizations for discussions focusing on building capacity for Takaful and cooperative insurance operators to compete in an increasingly competitive regional insurance market.

Speaking to the media present at the event, David McLean, Chief Executive of the Middle East Takaful Forum noted that “recent reports indicate that the GCC market currently contributes more than 41 percent of the gross Takaful premiums globally and there is tremendous growth potential yet to be realized. Maximizing the industry’s potential lies in addressing challenges and issues that will better position the industry to reach mass markets and achieve sustainable organic growth and development.

“With significant untapped potential in the region, it is essential that leading players in the industry focus on providing sophisticated and differentiated products with significant value propositions, promote transparency and adopt best practice international standards in order to optimize the growth potential and ensure long-term success in the dynamic Middle East Takaful market,” he continued.

A key highlight of METF 2013 was the highly-interactive power debate session which focused on building capacity and capability to enable Takaful and cooperative insurance operators to compete profitably. The Power Debate session was led by Ashar Nazim, Partner and Head of Islamic Banking Excellence Centre at Ernst & Young; and featured Ayman Adel El Hout, Executive Director of Medgulf Takaful; Adrian Flowers, Chief Executive Officer of SABB Takaful; and Amer Daya, Chief Executive Officer of Al Hilal Takaful ; as well as Nandakumar Duraiswamy, Head of Underwriting at Solidarity General Takaful, discussed key strategies that leading Takaful players in the Middle East will need to adopt in order to overcome the barriers to sustained growth and long term profitability for the Takaful industry in the Middle East and step up to the next level.

Speaking at the power debate session, Amer Daya, Chief Executive Officer of Al Hilal Takaful noted that “the Takaful industry has today built up critical mass in Malaysia and across key countries in the Middle East and North Africa region. The global Takaful industry currently represents only about one percent of the global insurance market[SO1] .”

“Underpinned by favourable demographics, development of supporting regulatory frameworks, growing affluence, and the overall development of the international Islamic finance industry in high growth potential emerging markets, the Takaful industry in the Middle East is poised for continued strong growth,” Daya pointed out. “However, efficiency, profitability and scale remain critical imperatives for the industry and it is essential to find innovative solutions to manage the challenges of an increasingly competitive Takaful market, drive operational efficiencies and improve the financial performance in the industry.”

Commenting on their participation at the event, a similar view was expressed by Nader Al Mandeel, Chief Executive Officer of Medgulf Takaful who said that “the global Takaful industry has been one of the fastest growing components of the international Islamic finance industry and the scenario in the GCC is no different. The Takaful industry in the region is rapidly moving beyond its niche status and certainly has the potential to surpass the conventional insurance industry in some key markets. However, a significant advantage that the conventional industry enjoys is economies of scale which the Takaful industry is yet to achieve.”

“Due to this, it is essential that Takaful players focus on improving their operating performance and profitability to maintain stability”, Mr. Al Mandeel said.

Central Bank of Bahrain ‘s Al Baker discusses the road ahead

In his opening remarks at the forum, Al Baker delved into the significant change in the industry and the needed steps ahead for future growth and stability.

“Today, as with other forms of Islamic finance, the industry has gained significant interest as a viable and efficient alternative model of insurance,” he assured the crowd, noting that the global Takaful contributions amounted to around USD13.7 billion in 2010, a significant growth of 23 percent compared to the previous year, according to the World Islamic Insurance Directory 2012. Overall, he said, the GCC market contributed around USD5.7 billion, which is more than 41 percent of global Takaful contributions, while South East Asia countries contributions stood at USD1.9 billion.

Indeed, Al Baker pointed out that during the past eight years, the Takaful industry has recorded growth rates of around 20 percent. Citing a growing awareness for the Shariah-compliant insurance industry, AL Baker express confidence that the sector was only set to flourish.

“In Bahrain, the Takaful industry is one of the fastest growing segments of the overall insurance sector,” he said, reporting that by the end of 2012, total Takaful premiums reached BD49.8 million compared to BD40 million in 2011, a significant growth of 25 percent.

“Overall, the Takaful market has grown by almost twelve times in term of premiums compared to 2003[SO2] . This growth is mainly due to the increasing demand for Shariah-compliant insurance, the public awareness on Takaful, entrance of international players in the local market that offer Takaful business and the existence of enabling legislation that promotes the development of Takaful in Bahrain,” Al Baker said. Currently, the Takaful premiums contribute to almost 22 percent of the overall gross premiums of the insurance industry in Bahrain, and the outlook for growth of this segment of insurance is very promising, he reported.

Al Baker went on to cite multiple reasons for the growth of the sector in the region and worldwide. Highlighting the significant economic growth of the MENA region as a whole, he nevertheless pointed out an overall low market penetration for Islamic banking, and by extension Takaful, indicating a positive growth outlook for the sector if it could take hold.

However, Al Baker was careful to note pitfalls the Takaful industry could face in the future.

“There are several challenges facing Takaful industry that need to be properly addressed in order to further enhance the long term profitability and the soundness of the industry, the first of which is the corporate governance issue regarding policyholder rights,” Al Baker said. In contrast to policyholders in a conventional mutual insurance company, he pointed out, who are owners and participants, Takaful policyholders have no such governance structures or rights, although in principle they are exposed to similar insurance risks.

“The second challenge is the issue related to the standardization of Takaful accounting standards and disclosure, especially those related to capital adequacy and solvency, disclosure of Qard’ Hassan, and regulatory framework,” Al Baker continued. “Another challenge is the lack of human talents that have the necessary exposures and experience in Takaful business, as well as those mastering Sharia compliance.”

But the most crucial tests for the Takaful industry in Al Baker’s opinion were saved for last, with special emphasis on their focus. “One of the most critical challenges facing the Takaful industry is the issue related to the limited availability of the Islamic instruments like sukuk, which are the most suitable type of the investment for Takaful companies,” he said. “Another challenge is with respect to offering micro-takaful to address the needs of lower income individuals in the society, as well as finding the appropriate distribution channels to offer takaful-assurance services through banks.”

Al Baker concluded his insightful remarks by noting that “the future prospects of Takaful industry will hugely depend on the combined efforts of all relevant parties” and that “collective effort is critical in order to maximize the potential for the Takaful industry.”

© Business Islamica 2013