Limited re-Takaful capacity will be a key challenge, according to Ernst & Young report

A report by Ernst & Young suggests that growth in the Takaful sector has outpaced that of conventional insurance sectors in most countries of the Middle East.

The inaugural ‘World Takaful Report 2008’, launched at the World Takaful Conference 2008 in Dubai, says current growth rates indicate a future Takaful industry of $10-15bn within the next 10 years. It also forecasts that accepted contributions globally could be more than $4.3bn in 2010, with 20% annual growth for the foreseeable future.

However, there are critical factors that must be addressed to maintain this expansion, the report says. Key challenges facing Takaful include a fragmented and under-capitalised landscape, limited reTakaful capacity, problematic asset management and lack of local solution offerings and local distribution channels. Meanwhile, the drivers of Takaful demand include high economic growth and increase in per capita GDP, a youthful demography, increasing awareness, a greater desire for Shari’a compliant offerings and increasing asset based, Shari’a compliant financing.

The report also confirmed the Gulf Cooperative Countries (GCC) as the heart of the global Takaful market, with over 50% of the value of global contributions of $2bn in 2006. Of the 133 Takaful operators worldwide, 59 are within the GCC countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

Noor Ur Rahman Abid, Managing Partner, Audit and Assurance Business Services at Ernst & Young Middle East, said, “It is clear that there are significant growth opportunities for the Takaful industry, especially when the estimated global insurance premiums are as high as US$3.7trn. Most Organisation of Islamic Conference (OIC) countries have underdeveloped insurance sectors. Premiums in the Middle East are at 1% of nominal GDP compared to 8% in North America. In addition, high levels of market liquidity and with income levels rising in the region, should contribute to a future rise in the global Takaful industry.”

Sameer Abdi, head of Ernst & Young’s Islamic finance services group, said the Islamic finance world remains excited about the outlook for the Takaful industry, despite the significant challenges. “Assets held and financed by the Islamic financial services industry are increasingly motivated to use Takaful to underwrite risk. Existing Takaful capacity is slowly replacing conventional insurance in the industry,” he said. “The challenge for Takaful operators lies not only in tapping extrinsic demand but also in developing their capacity and expertise to provide a competitive alternative to conventional insurance.”