Asia takaful: greater ingenuity is required to ensure awareness

Takaful remains an insurance market with plenty of untapped potential worldwide, even though growth has been rapid in the past few years.

A new report from Moody’s, for example, shows global premiums exceeding $4bn in 2007, and expected to reach $20bn by 2017. It makes clear the rising popularity of takaful insurance globally is primarily supported by the countries in the GCC, Levant, Africa and South-East Asia. Supported by the high Muslim population in these regions, takaful has experienced a five-year combined annual growth rate (CAGR) of 33.2% compared with 19.9% achieved by the conventional insurance industry in the same markets.

But a report by Deloitte suggests that CAGR for the premiums written by takaful companies has slowed in the past 12–18 months.

Moody’s too makes it clear that there are challenges faced by takaful insurers that may limit their growth opportunities, particularly for the smaller takaful operators.

It says: “Competition from well-established conventional players is high. Many conventional insurers have global presences, giving them technical expertise, financial strength and economies of scale, which may mean product offerings are a better fit for insurance buyers, or are offered at lower prices.”

Moody’s Hong Kong office vice-president Sally Yim believes it is lack of experience that is a huge challenge for takaful operators in many of the Asian markets. “The pool of talent is less than in conventional markets because takaful has not been in existence for so long. Also, in Asia, takaful is mostly limited to Malaysia and Indonesia so beyond those markets there is little experience of the concept.”

Development of standards

Partner at Clyde & Co’s Dubai office Peter Hodgins says: “A number of the Middle Eastern jurisdictions have specific takaful regulations, for example, the UAE, Bahrain and the financial centres in Qatar and Dubai.

“However, I am not aware of any markets in South-East Asia other than Malaysia and Indonesia that have specific takaful regulations. The approach taken by the regulators in Hong Kong and Singapore would reflect that of the Financial Services Authority [FSA] in the UK.”

He adds that the UK is one jurisdiction to require that takaful operators fit into their insurance legislation. The FSA (the precursor to the Financial Conduct Authority) has previously indicated that it would not separately regulate takaful, but would seek to ensure a level playing field.

Yim adds that the Malay regulator appears to be ready to develop standards in the sector, through greater regulation if need be, while in Indonesia, she says, “it’s not so clear what they have done to develop this business”.

Hodgins agrees, adding: “There has been significant investment by Bank Negara [in Malaysia] to facilitate the growth of the takaful industry. The establishment of a national Shari’a board has facilitated a consistent understanding of the Shari’a requirements. This is also supported by the strong Islamic finance market (especially the sukuk market).

“Indonesia seems to be following the example of Malaysia. However, from my understanding there is still significant work required on the regulations. There are also a significant number of start-ups with issues of scale.

Hodgins says that while there is still significant scope for growth there are real challenges for the industry including:

• achieving sufficient scale to compete effectively with the multinational and large local insurers (most takaful operators are start-ups and so quite small); and
• attracting talent and ensuring proper training in relation to the distinctions from conventional insurance.

He says there are also concerns around profitability. This is probably the greatest area of debate – a report by Ernst & Young (now EY) in 2012 suggested that the return on equity for takaful operators is significantly lower than in the conventional sector. As Hodgins says: “My view is that this reflects the relative youth of the industry (which is still burdened with the start-up costs) and the lack of efficiency that will come with scale. However, it is arguable that the ethical precepts that underpin takaful mean that it is inherently less profitable as result of the need to balance risk/reward better between the various stakeholders.

“If this is correct, shareholders need to be more realistic about what returns will be generated.”

Ensuring awareness

Another issue is market penetration. “Estimates suggest the Muslim population accounts for 24.79% of the global population,” says Hodgins. “However, awareness of takaful is limited and greater ingenuity is required to ensure awareness. Much of this population is comparatively poor and therefore products appropriate to their needs/resources need to be developed.”

There is a feeling across the market that the takaful sector needs to better distinguish itself from the conventional industry. Experience suggests that many Muslims (and indeed non-Muslims) like the ethical aspects of the products, but that price is a factor in the purchasing process. Hodgins believes the solution could come from government.

“Governments in Islamic countries can do much to develop the sector. If government entities and state-owned companies were to use takaful more this would set a greater precedent.”

However, more than that, Yim suggests there are substantial cultural barriers to takaful insurance across Asia. While Malaysia has adopted the concept and Indonesia is following with its extremely large population, the rest of Asia is hardly likely to follow suit. “We have seen some foreign insurers quite active in expanding their business but beyond these two countries, growth is relatively limited.”

As she says: “I am Chinese, so even if it was available why would I need to go for a takaful product? The concept is quite foreign to a lot of Asians – you can’t earn interest and there is a prohibition on gambling – it is a foreign concept to us.”