Although it remains a tiny part of Islamic finance, Takaful is no longer a novelty. In fact, that's now one of its problems. Simply being a Takaful company is no longer enough to draw in consumers. With more players entering the niche market, Takaful companies are finding themselves fighting over a limited customer base.
Of course, the customer base is growing too. Growing acceptance of insurance in the Muslim world and the introduction of compulsory health insurance in many regions is presenting new opportunities. However, experts at the World Takaful Conference 2014, held in Dubai in April, warned that Takaful must find its own market rather than capture a tiny piece of the existing one, which is already being served by larger conventional players.
According to Safder Jaffer, Managing Director and Consulting Actuary, Middle East & Africa, Milliman, Takaful companies don't stand much of a chance against conventional insurers as compulsory medical insurance is rolled out across countries such as the UAE.
"It's a tough one," Jaffer told Islamic Business & Finance. "Medical insurance is a cash f low management business with very thin margins - you need economies of scale, you clearly need a very solid infrastructure. I see health to be one of the most difficult lines for Takaful. Health is not a profitable line. Takaful means to give a profitable return to shareholders - in medical insurance, if you just about survive you're doing great!
"If there are people who want Islamic insurance then clearly there's room, but the player must compete with conventional and I don't see a unique value proposition for health - particularly mandatory health."
Fareed Lutfi, Secretary General for the Gulf Insurance Federation, believes that Takaful shouldn't try to compete with the conventional sector. Instead, it should learn from it. "We cannot compete with conventional - in this part of the world, we are only 12 years old and in Malaysia the concept is 30 years old," he told Islamic Business & Finance. "Takaful is in its infancy compared with conventional, which goes back 400 years. We never compete - we cooperate so we can learn. A lot of companies, particularly in ReTakaful, have a Takaful or Islamic arm such as Takaful Re and Munich Re. Their advisors - the parent companies - are the big boys."
Indeed, if Takaful joins the battle for new business as compulsory health insurance is introduced, it could end up the injured party as players are less likely to have the financial cushion conventional counterparts enjoy. "The risk that all players need to avoid is falling into the trap of under-pricing to gain market share," warned Bassel Hindawi, Member of the Steering Committee, Mena Insurance CEO Club and former Insurance Commissioner of Jordan. "If this happens, it will be risky, and there may be players that will have a cushion to sustain losses, but other players may not be able to survive."
"Compulsory health insurance creates an interesting opportunity, because the landscape is still there to be developed," Hindawi told Islamic Business & Finance. "There will be opportunities for both conventional and Takaful players to tap into this business. We're talking more or less personal lines which fit very well into the Takaful business model. All players, in particular Takaful players, need to be very prudent on pricing and make sure they design their health solutions on Shari'ah concepts which can be a very strong selling point for consumers."
Firas El Azem, General Manager of Takaful Re, agrees that Takaful companies cannot afford to cut prices and should instead concentrate on being real value for money. "There is a price war," he told Islamic Business & Finance. "Competition is quite high, especially in this region, and therefore it's very important for conventional and Takaful to go back to basics and calculate the price of products. If you don't price correctly, you make a loss."
Instead of competing for conventional business, Takaful must capture a new market: so where are the opportunities for Islamic insurance? "The opportunities are in personal lines; family Takaful, savings, pensions, mortgages; and aligning products to Islamic finance," said Jaffer. "I don't see a future for Takaful competing in health and motor insurance."
"This is opportunity for Takaful players to tap into personal lines and family Takaful in particular," agreed Hindawi. "The commercial business is not necessarily in need of Takaful solutions - conventional insurers have very much covered this and they are much more established than Takaful players. Therefore Takaful players need to look into identifying their niche areas to grow the business and get a piece of that growth."
Amer Daya left Saudi Arabia six months ago to take up the role of Chief Executive Officer at Al Hilal Takaful in Abu Dhabi. Daya believes there are great opportunities for Takaful in the UAE, if it can be marketed correctly. "The concept is not new, but the advent of Takaful in the region is newer than conventional," he told Islamic Business & Finance. "It's about finding bigger challenges to grow on the back of the conventional market. Takaful needs to build on the fact it's similar to mutual foundations in the west. It needs to pitch that it offers ethical solutions, and that its products are not linked to Haram sectors. The client needs to understand that Takaful is more of a caring segment than conventional insurance. It should not only be the price. It should be the service and how you deliver it.
"The biggest opportunities are in retail in the Middle East. It's a very young market and it requires a lot of support financially. As you know, there are a lot of expatriates in this market and a lot of young people strive to go out from university and school to buy a house, a car, get married... Not all of them can aspire to do that out of cash, so they want financial instruments. Those can be provided by banks, and the insurance can be provided by Takaful, whether it's motor, family or medical Takaful. So the potential exists, we just need the right regulatory environment around us."
Al Madina Takaful, which began operations as Oman's first Takaful company in January this year, is breaking a new market by selling service as well as ethical products. Gautam Datta, the company's Chief Executive Officer, told Islamic Business & Finance, "It's not so much about Takaful or conventional. It's about going back to the basics of insurance. What is it insurance provides? It provides protection. Society has a need for protection. Takaful should position itself as an entity that not only provides protection but does so in a transparent and ethical manner. It also fulfils the requirements of Islam, so it can definitely find a position for itself alongside conventional. The basic fundamentals are the same. There must be a product that addresses the needs of the customer. There must be a service that matches the expectation of the customer, if not go beyond it, and there must be a way the customer can easily access these services.
"It's not about Takaful competing with conventional, it's about Takaful creating a value for itself. I think in today's space, conventional companies have performed, but have also created a lot of dissatisfaction. The opportunity for Takaful is to leverage this by selling its higher level of governance. I don't want to imply that conventional insurers don't have a high level of governance, but purely from a structural perspective Takaful is governed by the regular as well as a Shari'ah board. The Shari'ah board looks after the interests of the consumer, so that in itself drives better governance in Takaful.
"If Takaful is also very open and sharing on its costs and charges, then that transparency creates a confidence among the public. But all that needs to be matched with service and skills. At the end of the day, it's a business. While the business is based on certain principles of faith, it has to fulfil all the requirements of the business. Customer service, good products, return on shareholders' capital... As long as Takaful can do that, it has a place for itself."
Azem believes Takaful should market the advantage that it has over conventional insurance: that Takaful holders may get money back. "Takaful is a different concept," he told Islamic Business & Finance. "The Takaful concept is a mutual fund managed by a company. If you as a consumer could have the choice between the same price and the same service, but with one you may get some money back, which one would you choose? If service is the same and the price is the same, logically you will go with the insurer that gives you the possibility of getting money back. If this concept is sold in the right way Takaful will have an edge against conventional business."
According to Hindawi, Takaful is missing a trick if it doesn't market itself to all faiths. "Takaful is a business model and it should be made available and marketed to Muslims and non Muslims - it's based on mutuality," he said. "Mutuals across the world cater to the needs of all segments of society. In Europe, two thirds of insurance players are mutual. This is where there is an opportunity for Takaful players to look at the experience of mutuals and learn from it to market Takaful products on business grounds rather than religious. That's where the opportunity arises for Takaful players to tap into new business opportunities and get a piece of it."
Peter Hodgins, Partner at Clyde & Co, sees a lot of opportunity for ReTakaful. "I think, from a ReTakaful perspective, there's a great opportunities as Dubai becomes the centre of reinsurance in the region," he told Islamic Business & Finance. "ReTakaful ought to position itself alongside reinsurance and build on the depth of expertise and the brand Dubai is building, and take advantage of increasingly strong regulations and try and use that as a form of leverage."
According to Mohamed Hussein El-Dishish, Chief Executive Officer of Emirates ReTakaful, a larger ReTakaful market would benefit the whole industry. "A major challenge faced by the global Takaful industry is the lack of added value from the ReTakaful industry, leading to an over-representation of conventional reinsurers in the market," he said. "However, recent developments and the emergence of new sizeable ReTakaful companies is an opportunity for the whole Takaful industry to have an integrated approach, and move to the next level.
"As the global Takaful industry is set to grow further, projected to hit the $17 billion mark in 2015, a lot more additional participation and a leading role is needed in the ReTakaful industry. To meet the demand, ReTakaful companies must move from a follower to a more leadership position."
Hodgins disagrees that Takaful must limit itself to the retail market. "I don't think the opportunities are limited, and I don't think it has to be focussed on personal lines," he told Islamic Business & Finance. "Take aviation risk - the airlines are owned by the governments and the governments are Islamic. There's a good argument for being able to offer Takaful products to these entities, but it's whether you have the capacity. The idea of a number of Takaful or ReTakaful players coming together to build the capacity necessary, I think that's inevitably the future."
A TALE OF SCALE
Building scale is an issue that comes up time and time again in the Takaful industry. Hodgins believes smaller Takaful companies will only succeed by offering unique products. "It's a challenge for Takaful to compete with conventional," he said. "The key question is how you differentiate yourself. I don't think that simply being Shari'ah-compliant is the answer. You need products that are differentiated and you are meeting the demands of your consumers. The difficulty the industry has it its scale; it is a fragmented industry and is fairly small in scale. Having the reach and ability to compete with conventional insurance does put it in quite a challenging place. I think the Takaful operators nimble enough to develop the right products will have an inherit interaction in the region."
Nevertheless, the industry must eventually build capacity if it is to stay profitable. "In many key countries, the Takaful market is becoming increasingly over-crowded with a number of domestic and international companies competing for a small pool of risks to cover," said Abdulla Mohammed Al Awar, Chief Executive Officer of the Dubai Islamic Economic Development Centre, in his keynote address. "Industry-wide profit margins have been under pressure and previously strong growth rates have started to decelerate."
Saleh Malaikah, Chairman, Rusd International Holding Group, Vice Chairman and Chief Executive Officer, SALAMA Group said, "Achieving and sustaining profitable growth poses a number of challenges for the Takaful sector and the question of the lack of scale amongst many industry players has yet to be properly tackled. With Takaful contributions currently around only about one per cent of the value of the total global insurance premium universe, Takaful has a long way to go in order to become more mainstreamed - nevertheless this low level of penetration also points to tremendous further growth potential if the industry can successfully address these challenges. This calls for industry leaders to take proactive steps and re-think strategies to realise the true potential of the global Shari'ah-compliant insurance market."
Lutfi believes consolidation is the only way forward for the Takaful industry. "In the UAE, there are over 60 companies, and for a market that's so small - $7-8 billion - the number of companies is high and therefore the market is fragmented. We do not have the capacity. We are small, we're going to stay small. We need mergers, we need bigger companies. We need companies with two-way traffic - giving and taking business from regions such as Europe. If we think small we will remain small."
However, the 'Dubai: Capital of the Islamic Economy' initiative has given the regional industry a boost. Al Awar promised crowds at the World Takaful Conference that Takaful was ingrained in the emirate's Islamic ambition. "In line with Dubai's determination to become the global capital of the Islamic Economy, the Dubai Islamic Economy Development Centre is committed to creating an enabling environment to reignite the growth of the Takaful sector," he said.
Experts hope Takaful will benefit from the focus on Islamic finance. "Clearly, state-led initiatives are needed to advance the Takaful industry," said Hindawi. "As has been witnessed, the industry has not performed well in recent years and therefore a vision has to be put in place to not only look at Takaful, but also Islamic finance at large.
"At the end of the day, if the Takaful industry is not efficient and profitable it will undermine the development of Islamic finance and ultimately the Islamic economy. Therefore, the Dubai initiative is pioneering in bringing under one umbrella a strategy to develop all components of Islamic economics, including Takaful. Much more needs to be done on the policy front, in particular bringing consistency to Shari'ah interpretations. Therefore, a national regulatory body that would regulate Shari'ah scholars would ensure there is a common interpretation for Takaful, which will then provide a catalyst for Takaful to build on."
"It presents a huge opportunity because it focuses the world on Dubai, and it makes sure that the potential growth in Dubai continues to be high," agreed Daya. "A number of efforts, including Dubai 2020, will help with investment pouring into the country and the expected infrastructure growth. When you have infrastructure you have an inf low of expats and investment. All of this is good news for the industry."
According to Jaffer, Dubai's ambition to be an Islamic economic hub will help harmonise the Halal industries. "There are a lot of opportunities to synergise the capital markets and the banking sector with Takaful," he said.
"Takaful is very small, so if it can be synchronised with the rest of the Islamic finance sector and provide a complimentary service I think it can work."
Lutfi also believes that the investment Dubai's Islamic initiative and Expo 2020 are expected to bring in will have a positive impact on the regional Takaful market, widening investment opportunities. However, better regulation will be needed to support this growth. "This initiative and Expo 2020 might encourage us," he said. "This creates a platform for investment, which is limited for Takaful and ReTakaful companies. This will be expanded to sectors such as the Halal food sector. New laws came in last year, but there is room to standardise the industry internationally."
"More needs to be done on the regulatory front," agreed Hindawi. "There's been some progress made on the international level but much more needs to be done."
Daya explained that the UAE's regulators are strained because of the variety it has to accommodate. "I believe this regulatory market is probably the most exposed, because it services a lot of nationalities within its economy," he said. "It's trying to cope with growth in Takaful, conventional insurance and it provides vehicles that don't exist elsewhere in the world."
"I think the UAE regulation for Takaful needs substantial consideration," said Hodgins. "I don't think Takaful is an area the regulator is focussed on to the same extent it is focussed on other areas. Regulation in the UAE needs to move on and develop. It needs to take into account the way that innovation is occurring in the market, ref lect the fact that people are moving to more online-based systems and deal with the challenges that brings. We need the regulator to be more forward thinking - to look at what the industry is doing, how it's dealing with its customer base and ensure those customers are properly protected."
Internationally, Takaful regulation remains a patchwork of different interpretations. "Though the global Takaful industry has witnessed strong progress, the development of related regulatory and supervisory frameworks has not kept pace and varies substantially between key Takaful markets," said Al Awar.
Takaful clearly remains poised for double digit growth; it is now a question of how thin its success will be spread, and if regulations can be bolstered in time to support it.
The risk that all players need to avoid is falling into the trap of under-pricing to gain market share
The commercial business is not necessarily in need of Takaful solutions - conventional insurers have very much covered this
The key question is how you differentiate yourself. I don't think that simply being Shari'ah-compliant is the answer