International Finance
Insurance July-August 2019 Magazine

Turbo charging Takaful growth in the Middle East

Turbo charging Takaful growth in the Middle East
If Takaful companies can develop innovative and Shariah-compliant family Takaful products, life Takaful will grow substantially in the region

Takaful, the Islamic insurance system based on Shariah law, has seen strong growth in recent years, underpinned by robust demand from Muslims as well as non-Muslims seeking ethical financial services. According to recent reports, the global Takaful industry reached $46 billion in 2017 and is expected to reach $52.5 billion by 2020.

Unsurprisingly, the Middle East, with its majority Muslim population, has always been considered one of the world’s most important markets for driving the growth of global Islamic insurance, although insurance has not been as historically commonplace in the Middle East as it has been in Western markets.

Within this context, Takaful is seen as key to increasing consumers’ appreciation for insurance and delivering on customer expectations. So what is driving the Takaful market in the Middle East?

The Gulf leading the way

Mostly led by the Kingdom of Saudi Arabia and the UAE, the growth prospects for Takaful remain strong in the GCC. The Takaful growth rate in these countries is well ahead of the conventional insurance market in the region. Moody’s data showed GCC Takaful firms’ published results for 2018 expanding at around 7 percent year-on-year. 

This is being driven by several factors, including regulatory changes as well as economic activity linked to planned events such as Expo 2020 in the UAE. Indeed, recent regulatory changes are a key driver to the future success of the Takaful industry here in the region. Not only has the spread of mandatory motor and medical cover increased the demand for Islamic insurance products, it has also had a beneficial effect on underwriting profitability and is expected to continue to do so.

While Takaful insurance covers general insurance, as well as life, medical and health, motor and education plans, approximately half the written business in the GCC is made up of property and accident insurance. Life insurance has also seen a surge in demand and is becoming an important component of both estate planning and diversification. Therefore, regulatory changes, such as making other types of insurance compulsory, has the potential to significantly boost the industry over the coming years.

The keys to further success

There are significant opportunities for Takaful operators in Middle Eastern markets, and primarily in the GCC, to provide sound Shariah-compliant protection that is in line with consumer needs and stands up to the international conventional insurance model. In fact, in the more mature Islamic finance economies such as Malaysia and Saudi Arabia, Takaful is price competitive with equivalent conventional insurance products, and has a significant proportion of non-Muslims as customers, especially those looking for ethically sound products.

Nevertheless, while conventional insurance and Takaful might have similar economic drivers, Takaful players must distinguish themselves and double down on their Islamic principles rather than try and imitate their conventional counterparts. For example, developing differentiated brands and specialised products where new segments are served can still be priced for value. Takaful companies should in fact leverage the ethical differences and the spirit of mutuality they offer through their risk-sharing model and Shariah-compliant investments. All while maintaining price competitiveness and product diversity.

Then there are specific verticals where we see strong potential growth. Health Takaful is a rapidly growing sector in the Middle East again driven by the trend towards obligatory health insurance. Life Takaful penetration, at present, also lags far behind general and health Takaful, as Muslims tend to have greater inhibitions when it comes to life insurance. However, if Takaful companies can develop innovative and Shariah-compliant family Takaful products, it is reasonable to assume that life Takaful could grow even more substantially.

Meanwhile, there is a shortage of Re-takaful capacity and this has left Takaful insurers with the dilemma of having to reinsure on a conventional basis. So strengthening Re-takaful operators would also assist the growth and expansion of Takaful insurance.

Rapid technological changes and innovations will similarly help evolve the Takaful industry. Takaful firms are challenged with adapting new strategies to provide reliable cash flows and developing innovative protection and saving products. For this sector to remain competitive, Takaful operators should embrace technology in all operational, sales, and marketing strategies. One form of innovation is to explore new business models and partnerships at the level of bancassurance by tying up with Islamic Banks and taking advantage of the arising opportunities that Fintech and Insurtech present. Some of the UAE based Takaful insurance providers have also now invested heavily in the technological advancement and innovation of their product offering and service delivery.

Stronger together

Finally, the industry is also seeing a challenge in the form of increased capital requirements, such as currently under consideration in Saudi Arabia. Such factors mean that consolidation in the Takaful sector looks likely and what’s more, sensible. The combined Takaful groups that we expect to emerge will likely have stronger and more sophisticated businesses, positioning them to further drive the industry as a whole.

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