Outlook for Shariah-compliant insurance in 2012




FW moderates a discussion focusing on the outlook for Shariah-compliant insurance between Sohail Jaffer at the FWU Group, and Anita Menon at KPMG in Malaysia.

FW: Reflecting on the last 12 months, have you seen the continued spread of Shariah-compliant insurance, or takaful, around the world? What new markets seem to be particularly active?

Jaffer: The takaful market is currently concentrated in Malaysia and the Middle East where it has been experiencing significant growth rates. Global gross takaful contributions grew by 29 percent in Southeast Asia in 2009, and by 31 percent in the Gulf Cooperation Council (GCC) whose ranks Oman has recently joined as the first takaful operator to start business this year. Takaful has undergone a significant internationalisation phase and managed to cross borders. Awareness and acceptance of takaful are also growing in regional markets such as Indonesia, Brunei, Turkey, India, and Pakistan. Takaful in Africa grew 26 percent in 2009 and the continent is witnessing considerable developments, with Kenya launching its first takaful operator in January of last year, and more recently with the acquisition in September 2011 of Takafol South Africa by Absa group, a leading financial institution majority-owned by Barclay’s. The Shariah-compliant insurance industry is also expanding in secular and Muslim minority markets like North America and Europe, especially in the UK, France, Luxembourg and Germany 

Menon: Despite growing concerns for the global economy, the Shariah-compliant insurance sector continued to expand with new takaful companies, joint ventures and new legislations dominating industry news. In 2011, the global takaful industry was valued at US$12bn, recording a remarkable growth of 32 percent on the previous year. The GCC market recorded impressive growth, with 70 percent of the market share coming from GCC countries, while Southeast Asian countries led by Malaysia accounted for approximately 21 percent of the global takaful market. GCC markets such as Saudi Arabia, Qatar, Bahrain and UAE have been tipped to become high growth markets along with the emerging markets, Oman, Kenya and Jordan. However, takaful penetration still remains low globally. Malaysia, one of the major takaful hubs, has found it difficult to increase penetration levels vis-a-vis conventional insurance, and accounts for only 10 percent of the insurable population. Growth in this sector has come on the background of mounting challenges posed by high competition among takaful operators, declining underwriting profits and high risk investment portfolios.

FW: In what ways are products being developed or altered within the Islamic insurance market to meet the needs of a growing customer base?

Menon: As in the case of any Islamic product, the basic tenant that drives takaful is Shariah compliance.  The takaful industry is mainly segmented between family and general takaful. Family takaful in particular is identified as the growth driver where it offers participants with an alternative investment tool and operators with better financial returns compared to general takaful products. Family takaful products tend to be popular in Southeast Asian countries while they are only starting to pick up in the GCC market, where the growth potential is very positive. As the takaful market globally is still in its early stages, new products will take some time to develop although some family takaful products are increasingly attractive to both Muslim and non-Muslim customers in secular markets on the basis of their pricing and returns. Family takaful products – for instance, savings, retirement and critical illness – offer new markets and diversification opportunities for takaful operators from their conventional counterparts. Diversification is critical for the industry to compete against well experienced and resourceful conventional insurers. Takaful operators should also explore new insurable needs, appealing to customers who look for ethical insurance products. 

Jaffer: In the aftermath of the global financial crisis, banks realised that they needed to embrace a more customer-centric approach. Financial institutions needed to take into consideration the savings and protection needs as well as the concerns of their customers. This led to the customisation of bancatakaful product offerings and their bundling with deposits, mortgages, and structured investment products. Takaful products are also becoming more and more competitive. Products include credit insurance, savings and protection, rider benefits such as accident, disability, travel benefits, retirement, and annuities. More personalised products are being introduced, including ladies plans and affluent plans with individualised protection including critical illness cover, travel cover and children protection.

FW: Could you explain the various distribution channels and networks being utilised to deliver takaful to more customers around the world?

Jaffer: Distribution strategy is a major success factor in the growth of Shariah-compliant insurance. Takaful is being distributed across a variety of channels such as agencies, direct sales and virtual marketing, but banks are the most effective channel of distribution for these kinds of products and services. Indeed, partnerships between banks and insurance companies bring many advantages, including an increase of sales opportunities, optimising the sales force of each player, customer segmentation, brand recognition, competitive advantage and differentiation, and decreased operational costs through the adoption of integrated technology.

Menon: Takaful operators mainly rely on agency networks and bancatakaful to source their Shariah-compliant protection products. Further, takaful operators seeking access to commercial business are increasingly forming alliances with government and corporate clients. Bancatakaful is gaining particular popularity in the GCC, where takaful operators have formed joint ventures with the region’s Islamic banks. This has multiple benefits for takaful operators, mainly allowing easy access to readily available markets. The increasing size of the Islamic banking market and its assets would make this avenue an attractive option. Agency power is vital in attracting high net worth individuals as well as the emerging middle class in many developing countries, and it is generally the preferred option for family takaful operators. However, as a matter of convenience and simplicity in bundling takaful products with a bank’s existing products, bancatakaful may outpace the agency model in the future. As takaful operators seek for more efficient channels, hybrid distribution models are also gradually gaining traction, where the agency model utilises a bank’s customer base. In the era of social media, takaful operators need to explore new and appealing channels to reach out to new customers.

FW: What trends have you seen in the use of takaful windows versus dedicated takaful operators?

Menon: Takaful windows are a trend observed in new and growing markets where growth is very much dependant on the entry of new players. The takaful window model would typically involve a conventional insurance company offering takaful products without establishing a dedicated entity. In new takaful markets, established players are keen to open windows before deciding to launch full scale takaful operations. Thus, window operations are financially sound and stronger than a dedicated takaful set up. Emerging markets such as Indonesia and Qatar have allowed takaful windows to spur growth, and in another development, Pakistan has introduced new rules to introduce takaful windows in the country. Largely, this trend will change as the regulators begin to take a strict view of Shariah compliance. This has been the view of mature markets such as Malaysia and Bahrain, where a separate entity is required to offer takaful products. In Malaysia for instance, multinational insurers have positively responded through the establishment of dedicated takaful operations. There are currently 12 takaful operators in the Malaysian market, comprising of local and foreign insurers offering takaful through a dedicated subsidiary.

Jaffer: A takaful window involves a conventional insurance company offering Shariah-compliant insurance products without establishing a separate legal entity for the sale of such products. This set up could lead to much faster growth for the industry and would encourage entry of new players into the market. Regulatory developments in certain countries are limiting the development of this trend such as those in the UAE, Qatar and Oman where the regulators do not permit conventional insurance to operate Islamic windows. However in other countries, where windows are permitted this trend is more prevailing than fully fledged operators such as Indonesia, where out of the 39 takaful operators, 36 are takaful windows. Takaful windows are predicted to see success in other Asian countries such as Sri Lanka, India and Bangladesh, and will play a big role in promoting takaful in secular countries such as Turkey, as well as Western countries who are welcoming Shariah-compliant insurance.

FW: Have there been any legal and regulatory developments to promote Islamic insurance? What recent changes have you seen in Oman & Qatar, for example, and what is the significance of these developments?

Jaffer: Many countries have modified their legal framework and issued new guidelines in order to comply with Islamic insurance. Sales of takaful products through bank channels have multiplied, enhanced by the development of legislation to allow for banks to transact bancatakaful business. Among the latest regulatory developments, the UAE, Egypt and Pakistan have strengthened their willingness to promote the expansion of takaful. Regulators of those countries particularly developed the framework in 2010. In the UAE, the government has issued a law on the takaful system. The Egyptian Financial Supervisory Authority has completed the preparation of the first draft of regulations that govern the sale and marketing of bancassurance. The Securities and Exchange Commission of Pakistan (SECP) has imposed bancassurance guidelines. In Oman, the Capital Market Authority (CMA), the national regulator is already working on a new regulatory framework for the Shariah-compliant finance. The CMA also issued bancassurance directives in May 2010, allowing an insurer to tie up with one or more banks licensed in Oman to market one or more insurance products. 

FW: Could you outline some of the key challenges to the growth of Shariah-compliant insurance, such as increased competition in the market, product development, and takaful returns? Is the market well-positioned to overcome such challenges?

Jaffer: Despite the thriving growth and progress of takaful, challenges still stand in the way of the globalisation of takaful as a viable alternative to conventional insurance. Takaful is still encountering low economies of scale in comparison to conventional insurance. Other challenges include limited Islamic investment avenues, a lack of re-takaful capacity, a lack of standardisation and a shortage of qualified personnel. The enhancement of operational excellence is also fundamental in the success of takaful. It involves the improvement of processing claims, underwriting, policy administration, operational infrastructure and risk management.

FW: How do you expect the Shariah-compliant insurance market to evolve through 2012?

Menon: In 2012, takaful operators are, as are other financial institutes, entering a fragile global economy and challenging business environment. Despite these challenges, the takaful industry is expected to grow steadily in key markets in the GCC and Southeast Asia. In Malaysia takaful operators are fast gaining ground, with increasing local market shares and plans to expand beyond Malaysia into neighbouring markets such as Indonesia, which is attractive due to its large Muslim population and low insurance penetration rates. As the Muslim population today is relatively younger, takaful penetration levels among young age groups will be a critical success factor going forward.

Jaffer: Takaful is entering a stable development phase. Its popularity continues to rise among underinsured populations within markets with huge untapped potential. Its appeal has also expanded beyond the handful of markets where it is presently concentrated. Evolving market conditions and affluence trends, as well as an increasing appetite for Shariah-compliant products are creating unlimited opportunities. The recent political changes across the Middle East region will create unlimited opportunities for takaful growth and will open doors for GCC operators to export their expertise and take over new markets with a massive potential for cross border expansion. The renewed interest in ethical investing reflecting consumers’ demand for enhanced transparency, security and equitable approaches that extend beyond ‘profit maximisation’, could also enable takaful to establish itself as a credible alternative to traditional insurance and cater to a broader customer base, including non-muslims, by capitalising on the ethical and social responsibility attributes rather than faith. Focus on regulation, technical expertise, marketing, product innovation and positioning, and innovation are only a few of the pressing issues that need serious attention from takaful operators in order its take off towards globalisation.


Sohail Jaffer is a partner at the FWU Group. He is also head of International Business Development for ‘white label’ bancassurance and investment services. He has successfully originated, negotiated and won several major bank distribution deals in the GCC region, Pakistan and Malaysia. He can be contacted on +352 26 197 709 or by email: S.Jaffer@fwugroup.com.

Anita Menon is an executive director with KPMG Business Advisory and heads the Financial Risk Management practice at KPMG in Malaysia. She has worked extensively with clients locally and globally in the financial services sector and her areas of specialisation include business strategy, risk management, performance management and feasibility studies. Ms Menon sits on KPMG’s Global Islamic Finance and Investments Groups (GIFIG) comprising KPMG Islamic Finance thought leaders from member firms around the world and leads the practice’s development in KPMG Business Advisory in Malaysia. She can be contacted on +60 3 7721 3388 or by email: anitamenon@kpmg.com.my.

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Sohail Jaffer

FWU Group


Anita Menon


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