Global Takaful contributions to touch US$12 billion in 2011: Ernst '&' Young
The takaful industry is concentrated mainly in the MENA and South East Asia regions, with Saudi Arabia (contributions totalling US$3.86 billion in 2009), Malaysia with US$1.15 billion and the UAE (US$640 million) being the top three takaful markets globally. Most GCC markets have witnessed a slowdown in takaful growth with only Saudi's takaful market remaining strong due to the continued rollout of compulsory medical insurance. Sudan, with contributions of US$340 million, is the most significant market outside these regions. In addition, Egypt, Bangladesh and Pakistan are growing at a rapid pace.
In terms of regions, Takaful contributions in the Indian Subcontinent grew by 85%, making it the world's fastest growing takaful market. It was followed by the growth in Levant (40%), GCC (31%), SE Asia (29%) and Africa (26%).
"The MENA takaful market is much younger than the Malaysian market and, therefore, has not yet achieved the same level of scale. This affects the operating performance of the takaful players. Within the MENA region, the GCC is a more competitive market with a larger number of players and will drive growth for the industry. Key takaful markets are characterized by low insurance penetration rates and comparatively high rates of economic growth, leading to a positive outlook for the sector as a whole," says Ashar Nazim, Executive Director '&' Islamic Financial Services Leader, Ernst '&' Young.
In terms of countries, Indonesia topped the takaful market with a growth rate of 67%, followed by Bangladesh (58%) and Saudi Arabia (34%).
According to the report, the top strategic issues facing takaful are competition for growth, diversification and specialization and the cultural and religious acceptability of insurance.
An increasing number of takaful players in key markets have intensified competition, with small local players competing against established conventional players. Competing for commercial business requires further capacity, underwriting expertise and better broker relationships.
The second issue impacts returns directly. Over concentration in certain business lines and lack of diversification has led to takaful growth primarily driven by personal lines and led to a shortage or absence of capacity in various commercial lines. This has resulted in takaful operators having lower return-on-equity (RoE) than conventional insurers, especially during the economic downturn.
In the GCC, average RoE of conventional insurers was 11% while the takaful sector posted 10% in 2010. In Malaysia, the average RoE was 16% for conventional insurers and 6% for takaful operators. Malaysia boasts significantly lower claims ratios than GCC, largely due to the difference in dominant business lines. The GCC is dominated by general takaful whereas Malaysia is mostly family takaful.
The third issue is of social systems of protection and reliance on family ties that have traditionally been dominant in Middle Eastern and South Asian countries. Awareness of risks, implications and Shari'a permissible takaful solutions is still limited. Growth in the GCC is primarily driven by compulsory insurance rather than voluntary policies.
The family takaful market remains underpenetrated and is estimated to contribute only 5% of gross contributions in the MENA region. By comparison, conventional life in 2009 contributed 58% of gross global insurance premiums. Family takaful in Malaysia is highly penetrated and is estimated to contribute 77% of net takaful contributions in 2010.
Due to lower proliferation of services in takaful, operators generally retain more business, the result of less complex lines and extra capacity. They also have higher underwriting leverage, as they have less equity when compared to established insurers and limited solvency requirements.
Nazim adds: "Although 2009 was a comparatively slow year for the takaful industry, growth estimates remain on course to touch US$12 billion by 2011. Takaful's potential remains an important feature of Muslim emerging markets for many indigenous and global insurance players." Competition, shortage of expertise and socio-political uncertainty are key business risks for takaful in 2011. Other challenges include evolving regulations, misaligned cost base and achieving an underwriting profit.
"Based on our assessment, 2010 was a better year for takaful growth, although poor profitability and an overreliance on investment income remain key challenges. Over 70% of the MENA CEOs we polled identified competition as a key risk going forward. In addition, the takaful industry is yet to witness the much talked about consolidation, and organic growth still appears to be the preferred route for many operators. But the shortage of a qualified talent pool is a hurdle that operators have to plan for. This expertise is scarce and comes at a premium," concludes Nazim.
WAM/MAB