The market for Islamic insurance is an attractive prospect in the Middle East, with recent years seeing a proliferation of providers, driven in part by products being made compulsory. Published in MEED Insurance supplement 2011
The already crowded Gulf Islamic insurance (takaful) market will soon get even more competitive, when the UAE-based National Takaful Company (Watania) begins underwriting its first policies later this year.
The company is due to list its shares on the Abu Dhabi Securities Exchange in the coming weeks, after running a successful initial public offering (IPO) in April. According to the National Bank of Abu Dhabi, which acted as the financial advisor and lead manager for the IPO, the AED82.5m ($22.5m) share sale was oversubscribed seven times.
It is the latest in a steady stream of new market entrants in recent years. These include Saudi Arabia’s Alinma Bank, which set up a SR200m ($53.3m) takaful company in March 2010 with several local and international partners.
Rapid growth in Islamic insurance market
The reason the Gulf takaful market is proving so attractive to insurers and investors alike is simple. Islamic insurance is one of the fastest growing areas of the insurance industry and, with insurance coverage in the region so low, there is plenty of scope for it to grow even more. Across the GCC, insurance penetration rates are generally less than 2 per cent of gross domestic product, compared with closer to 10 per cent in mature markets.
“It’s growing at a phenomenal rate and I don’t think it’s going to diminish,” says Safder Jaffer, the Dubai-based takaful practice leader at US consultant Milliman. “Penetration is very, very low in this part of the world.”
In 2009, the global value of takaful contributions, which are equivalent to premiums in the conventional insurance industry, grew by 31 per cent to reach $6.9bn, according to figures from Ernst & Young, an international professional services firm. Last year, growth is thought to have been just as strong, with contributions rising to an estimated $9.1bn. The industry remains on course to generate contributions of almost $12bn this year. The conventional insurance market, by contrast, is thought to be growing by no more than 15 per cent.
Within the global takaful market, the GCC is by far the most significant region, accounting for about 70 per cent of all contributions. It has been growing in line with the global average in recent years, partly because the industry is starting from such a low base, but also because some governments have made insurance compulsory in certain instances, such as medical cover.
“Across the Gulf region, we’ve seen pretty high levels of growth and that has in part been driven by lines being made compulsory,” says Neil Gosrani, credit analyst at US ratings agency Standard & Poor’s and an expert on the takaful market.
“Medical business has been the one to take off in the past couple of years, particularly in Saudi Arabia,” he says. “We expect other countries in the region to introduce compulsory lines in a similar fashion.”
Saudi Arabia is by far the largest market for takaful products, with about 80 per cent of all contributions in the region originating in the kingdom. The UAE accounts for a further 13 per cent, while Kuwait, Qatar and Bahrain between them share just 7 per cent of the regional market. Oman still does not allow takaful companies to operate.
However, while the overall picture appears bright, the situation varies considerably from country to country. Most GCC markets witnessed a slowdown in takaful growth in 2009 compared with the previous year. Saudi Arabia was the only market where growth accelerated due to the introduction of compulsory medical insurance.
Skills shortage for insurance sector
There are a number of long-standing problems that have hampered the growth of takaful companies over the years and are still apparent today. Among them is a lack of skills, something that places a premium on experienced staff. The number of sharia scholars with the necessary financial market knowledge is also limited.
Such issues are all but inevitable in a young industry. The first takaful company in the world was set up in Sudan in 1979. Although others soon followed in the Gulf, the market has only begun to pick up momentum in the GCC in the past five or six years. Regulators have been struggling to keep up and there is still a lack of clarity and consistency in regulations, which vary considerably from country to country.
“Generally, in the Middle East, whether it’s takaful or conventional insurance, regulation is rather weak,” says Lukas Mueller, head of Middle East client management at Swiss Re, one of the world’s largest reinsurance companies, which also offers retakaful services in the region. “You have certain markets with very advanced regulatory bodies and Saudi Arabia is one of them. What is lacking is a more global understanding of what takaful and retakaful is all about. It will take a lot of time until we have uniform and sustainable standards.”
Companies that have successfully negotiated the regulatory maze face a further problem in the dearth of suitable sharia-compliant investment opportunities for their funds. The investment strategies they have adopted have also tended to be relatively aggressive. Gulf takaful companies have generally invested more in real-estate assets and the stock market than their peers in other regions and less in more stable assets, such as sukuks, which has contributed to a volatile performance in terms of profits.
“A challenge that takaful and retakaful companies face is a lack of suitable investment opportunities because the products are very limited,” says Mueller. “You can just have your money in an interest-free account, but that doesn’t help you a lot. On the life assurance side, where you need to have a proper asset-liability match, there is a lack of liquid asset markets. Companies in the Middle East are quite often overexposed to rather volatile regional equity and real-estate markets and that is probably not helping them to grow.”
Even as they try to grapple with all these issues, operators could benefit from expanding the range of risks they cover, although there have been some notable developments over the course of last year, including the Dubai-based Al-Yah Satellite Communications (Yahsat) securing a takaful space policy in April 2010. The policy, which was signed with two local insurers, Methaq Takaful and Elseco, covers the launch of the Y1A and Y1B satellites and their first 12 months in orbit.
Of more fundamental importance to the insurance industry is the wider cultural challenge of trying to gain acceptance for the idea of insurance across the economy and society.
“The lack of insurance awareness in general is an issue,” says Mueller. “There is a growing insurance awareness, but compared to other emerging and mature markets, it is still far behind.”
Raising the risk awareness of businesses and convincing them to insure against it may have been made easier by the wave of political turmoil around the region this year. It may also lead to some governments opening up their markets to Islamic insurance for the first time.
“There are some regimes that never allowed Islamic finance and now the public will ask for more Islamic finance, so I think it will only grow,” says Jaffer. “I think it will have a positive impact.”
One market that may open up in the coming years is Oman, which previously barred Islamic finance companies. Approval has recently been given to set up the country’s first Islamic bank and further sharia-compliant products may follow in the years ahead.
However, in the short-term, the political unrest may cause more problems than opportunities for insurance companies, particularly in Bahrain, which has been a hub for the takaful industry, but has also witnessed widespread violence as the government moved to suppress the protest movement.
“When the problems were going on [in Bahrain] there was a lot of talk of various companies going to other financial centres,” says Gosrani. “But there’s obviously a difference between talking and doing something and to my knowledge no companies have left. It’s too early to tell what the long-term impact will be.
“On a more practical day-to-day level, we would expect some sort of impact from the recent troubles in terms of business volumes. If your client can’t get into your office to sign a new policy, your business is going to be down.”
Dubai-based Islamic Arab Insurance Company (Salama), which is one of the world’s largest takaful and retakaful groups, says the impact on its business has been minimal so far. But takaful operators are now keenly aware of the potential for greater harm. In a survey of industry executives carried out by Ernst & Young in February and March this year, just as the political turmoil was gaining momentum around the region, socio-political uncertainty was cited as the third most important business risk facing the industry, behind rising competition and a shortage of expertise. A year earlier it had not featured at all in the top 10 risks.
Insurance industry consolidation
Should any companies begin to suffer then it might offer the spur needed for industry consolidation. The proliferation of takaful providers and the relatively small size of most of them has lead industry observers to speculate about the likelihood of consolidation, although to date it has yet to happen.
“Consolidation across the region is often talked about, both in terms of takaful and conventional companies, but when it will come is far harder to predict,” says Gosrani. “We’ve yet to see any big moves towards that. What we’ve been seeing more of is companies gradually expanding outside their home markets and setting up in neighbouring countries.”
Among those that have been expanding in recent years is Bahrain-based Takaful International, which in April opened its first branch in Qatar. More cross-border expansions are expected and there are also likely to be many more companies entering the market, following in the footsteps of Watania and others, before consolidation starts to take hold. The question will be whether the recent growth levels can be sustained to the extent that all of them can prosper.