The growth of Shariah-compliant insurance
April 2011 | 10QUESTIONS | RISK MANAGEMENT
FW speaks with Sohail Jaffer at the FWU Group about the growth of Shariah-complaint insurance.
FW: Could you outline the basic principles of Shariah-compliant insurance?
Jaffer: Shariah-compliant insurance is based on the principle ‘Ta’awun’ which means ‘mutual protection’. The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) defines it as “a system through which the participants donate part or all of their contributions which are used to pay claims for loss suffered by some of the participants”. Takaful is based on mutual solidarity, responsibility, assurance, protection, and assistance between groups of participants. The main attributes of Takaful are transparency of terms, conditions and fees, consumer fairness, and full disclosure with no ‘hidden extras’.
FW: How would you characterise the spread of Takaful around the world? Are awareness and acceptance growing in niche regional markets?
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 28 percent in South East Asia between 2005 and 2008, and by 45 percent in the GCC. Awareness and acceptance of Takaful are also growing in regional markets such as Indonesia, Brunei, Turkey and Pakistan. The Shariah-compliant insurance industry is also expanding in secular and Muslim minority markets like North America and in Europe, especially in the UK, France, Luxembourg, Germany and Sweden.
FW: What trends have you seen in the evolution of the Islamic insurance market, in terms of product offerings to meet customer needs?
Jaffer: In the aftermath of the global crisis, banks realised that they needed to rethink their business model and become more customer centric. 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 bundle 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.
FW: How important are effective distribution channels and networks to the growth of this market, especially bancassurance?
Jaffer: Distribution strategy is a major success factor in the growth of Shariah-compliant insurance. 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.
FW: How are Shariah-compliant insurance providers faring in competition with conventional insurers?
Jaffer: Takaful offers many unique advantages compared to conventional insurance. In addition to the ethical investments in compliance with Shariah principles, Takaful is characterised by the following attributes. First, it is consumer demand led. Second, it offers a high growth rate. Third, it involves trusted brands. Global brands such as HSBC, Standard Chartered Bank are involved in the distribution as well as international insurance providers on the supply side like Allianz, Prudential and Tokio Marine.
FW: To what extent is Takaful moving into mainstream insurance company offerings? What joint ventures and other tie-ups demonstrate the attraction of Islamic insurance to multinational companies?
Jaffer: The Islamic insurance industry is estimated to be growing at an annual rate of between 15 and 20 percent, compared with a growth rate of below 10 percent for conventional insurance. Thus the conventional insurance industry, particularly in markets such as Malaysia and the member states of the Gulf Co-operation Council (GCC), has espoused the potential of Takaful. Indeed, many of the world’s leading insurers have thrown their weight behind the development of the Takaful industry by establishing new subsidiaries or negotiating joint ventures. Examples of large tie-ups include ING Management Holdings Malaysia and Public Bank and Public Islamic Bank; AMMB Holdings and Friends Provident Group; HSBC Indonesia and PT Asuransi Allianz Life; Al Ahli Takaful and National Commercial Bank in Saudi Arabia; and American International Assurance and Alliance Bank Malaysia.
FW: Have there been any legal and regulatory developments to promote Islamic insurance?
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 have 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.
FW: Could you explain the division of losses and liabilities in the Takaful structure?
Jaffer: The key attribute of Takaful is the principle of mutual guarantee.
Islamic insurance aims to pay a defined loss from a defined fund. The loss is covered by a fund created by the donations of policyholders (both the insurer and the insured). Liability is spread amongst the policyholders and the losses are divided between them. The excess contribution over claims payments in the risk pool is called surplus. It is shared between the participants and the Takaful operator in an agreed ratio. When the losses overwhelm the primary insurer’s resources, a Retakaful arrangement then serves to share liability.
FW: What challenges, if any, threaten to hold back the Islamic insurance market?
Jaffer: Considerable challenges continue to stand in the way of the globalisation of Takaful as a viable alternative to conventional insurance. First, the industry needs to improve after-sale customer service. Second, Takaful is still encountering low economies of scale in comparison to conventional insurance. And third, the enhancement of operational excellence is fundamental in the success of Takaful. It involves the improvement of processing claims, underwriting, policy administration, operational infrastructure and risk management.
FW: What are your thoughts on the long-term growth of the Shariah-compliant insurance market?
Jaffer: The Takaful industry has gained momentum in the MENA region and South-East Asia. Furthermore, there is a potential for an accelerated expansion of Takaful products and services in several secular or Muslim-minority countries. Indeed, the industry has recently recorded a number of encouraging initiatives in the UK, France, Germany, Luxembourg, Turkey and Canada. The long-term growth of Shariah-compliant insurance should then witness an introduction of this industry in conventional insurance-dominated countries as well as an increase in joint ventures between banks and insurers along with the establishment of Shariah windows.
Sohail Jaffer is a partner and head of International Business Development for ‘white label’ Bancassurance and investment services within the FWU Group. 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.
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