Takaful insurance and reinsurance is set to explode in coming years.

It is an interesting fact that, although Muslim countries represent 25% of the world's population, they only account for 5% of the global insurance market. This is partly because insurance penetration among Muslim countries as a percentage of gross domestic product (GDP) is relatively low, at between 0.5% and 1.5%. Over the last few years, however, an Islamic alternative to a conventional mutual insurance programme has been launched, based on Shari'ah compliant principles and investment strategies.

Takaful insurance, as it is called, has several models. Similarly, takaful reinsurance (retakaful) is Shari'ah compliant reinsurance of takaful companies. The basic principle of Islamic finance is financial compliance with Shari'ah laws, which forbid charging and accepting interest, activities which are considered ‘haraam' (which loosely translates as “earned without effort”). Islamic finance is also employed in socially responsible investments.

Takaful insurance, which currently accounts for barely $2bn, has been growing at an exponential rate, thanks mainly to the fact that there is a strong demand for it from the global Muslim community, with its growing oil-based wealth.

Experts have estimated that, by the year 2015, the conventional global insurance market will touch $1.6trn, which would constitute 99.3% of the market, whereas takaful insurance would be around 0.7%, amounting to $11bn, a leap in growth from its current level of $2bn. Arab counties in the Middle East, Muslim countries in South-East Asia like Malaysia and Indonesia are all forecast to grow at around the same annual rate.

“Since the proceeds of takaful insurance are employed in infrastructure and industrial projects, predominantly in Muslim countries, the community feels drawn towards it,” says Abdallah Kubursi, regional vice-president of AIG MEMSA. “One must also mention that takaful rates are much more competitive than conventional insurance, and efforts are being made in Muslim countries to regulate the market better – efforts which inspire confidence.”