Although the concept is far from new, recent years have seen takaful insurance booming, says Shirish Nadkarni.
The concept of Takaful, or Islamic insurance, may appear new, but has been around for nearly three decades. It accounts for an estimated $2bn in annual premiums from a global Muslim population of around 1.6 billion. Since the Shari’ah prohibits risky investments and accepting interest against deposits, the concept of takaful insurance – where there is shared responsibility, and which is therefore strongly encouraged in Islam – is being increasingly embraced by the world’s Muslim community.
Takaful, an alternative form of cover whereby a Muslim can protect himself against the risk of loss, is finding more subscribers than ever. Four fundamental factors must co-exist to establish the proper framework for a takaful system:
• Nea’a, or utmost sincerity of intention for knowingly following guidance and adhering to the rules of a takaful system;
• Integration of Sharia’ah conditions regarding risk protection sharing under ta’awuni principle;
• The presence of moral values and ethics. Business is conducted openly in accordance with utmost good faith, honesty, full disclosure, truthfulness and fairness in all dealings; and
• No unlawful element that contravenes the Sharia’ah; and strict adherence to Islamic rules for commercial contracts.
First launched in Sudan in 1979, takaful insurance took off in Malaysia at the start of the new millennium. Its popularity now extends as far as Singapore and Sri Lanka, while there is interest in the Philippines, South Africa, Nigeria, and some former Soviet Union states. Today, some 28 registered takaful companies worldwide write general takaful (commercial property/liability) and family takaful (life) risks on a direct basis. A further ten takaful programmes are either Islamic “windows” or marketing agencies, that place insurance risk with conventional insurers or with takaful operators.
The total number of takaful companies could even exceed 28, as insurance companies in Sudan are deemed to operate in accordance with Shari’ah guidelines.
At least four more Middle East takaful companies are set to be established, in Bahrain, Kuwait, United Arab Emirates (UAE) and Egypt. Several others are being contemplated in countries such as Saudi Arabia, Pakistan, Australia and Lebanon.
“Overall, the takaful industry in the Middle East region is newly emergent when compared with other relatively developed markets such as Malaysia,” said Dawood Taylor, group head, takaful ta’awuni (Quran-compliant takaful) division of Jeddah-based AlJazira Bank.
“The more successful companies in the Middle East, especially in Bahrain and the UAE, have grown at an annual compound rate of 15%, which seems sedate compared with the 60% annual growth rate
Bank AlJazira is the first banking institution in Saudi Arabia to introduce takaful ta’awuni. It has volunteered to conduct such business in full compliance with Shari’ah principles and satisfy the legal regulations and guidelines issued by the Saudi Monetary Authority (SAMA) for takaful operators.
The UAE’s big three
The UAE is another major Middle East centre for takaful operations. Of 49 insurance companies that operate in the UAE, three have been classified as Islamic insurance firms. Of these, two are listed on the Dubai Financial Market and one on the Abu Dhabi market. The largest of these, which commenced operations in April 2003, is the Dubai Islamic Insurance & Reinsurance Company, better known as AMAN.
A publicly held company engaged in general and medical insurance business in accordance with the Islamic Shari’ah, AMAN was launched with paid-up capital of UAE Dirham (AED)60m ($16.4m). Dubai Islamic Bank and other founding shareholders, own 45% of AMAN’s capital; the other 55% was sold through an initial public offering that was oversubscribed five times. AMAN’s insurance operations cover motor, marine, fire, engineering, general accident, life and medical risks. It also runs investment funds in line with Islamic principles.
Last May, the group upped its capital from AED60m to AED200m through a private placement of 14 million shares. Non-UAE nationals were allowed to hold up to 15% of the number of shares outstanding once the capital increase was completed. In 2005, AMAN distributed a total of 15% to shareholders in cash dividends and 15% in bonus shares. Policyholders received 2% of the net profit. Mudarib fees rose 503% to AED10.37m in 2005, while its net profit jumped 759%. Growth came after the main sources of income – investment income, and mudarib and wakala fees received – grew by 366%, 503% and 77% respectively.
The second takaful company, Islamic Arab Insurance (IAIC, better known as SALAMA) has been writing all classes of general insurance business, but mainly motor. SALAMA completed its product portfolio by introducing medical and life insurance during 2006. The company went public in July 2005; the IPO increasing its capital from AED50m to AED1bn. The previous January, SALAMA acquired an 82.21% stake of Takaful and Re-Takaful International Investment Corporation (TARIIC) of Bahrain; which increased to 95% in May 2006.
TARIIC is a holding company and does not carry out any commercial activities in Bahrain, but owns 100% of Tunisia-based Best Re, the world’s largest retakaful company, having increased its equity stake from 60% in May 2006.
TARIIC also owns 52.6% of Sosar Al Amane Assurance in Senegal, 89.1% of Al Baraka Oua Al Amane in Algeria and 51.1% of Egypt Saudi Insurance Home in Egypt. SALAMA now relies more on investment income since its capital increase than on traditional takaful insurance operations. It boasts the world’s largest takaful and retakaful network, and launched an Islamic reinsurance company in Saudi Arabia with a capital of SAR1bn.
The third takaful outfit operating in the UAE, Abu Dhabi National Takaful Company (known simply as TAKAFUL) was established in Abu Dhabi in November 2003 as a publicly-held company with shares listed on the Abu Dhabi Stock Market. TAKAFUL, which has a paid-up capital of AED60m, was founded by Abu Dhabi Islamic Bank, Abu Dhabi Investment Company and various reputable UAE institutions and individuals. It plans to offer 49% of its equity to GCC nationals. Gross written premiums amounted to AED53.6m in 2005. TAKAFUL’s operating profit rose 88% to AED4.65m, and investment income grew by 656%, adding AED30m.
A regulatory gap
The absence of a special independent insurance regulatory body in the UAE has proved an obstacle. A report by Jordan Investment Trust found it had resulted in malpractices in the insurance industry, and claimed that Islamic insurance had been particularly affected. Some insurers, both Islamic and non-Islamic have accepted excessive stock market risks with no strict liquidity requirements, putting them at a higher risk exposure. Although the Ministry of Economy is charged with monitoring the industry, the lack of legislation remains a challenge.
The risks to takaful companies from their heavy reliance on stock market performance are further exacerbated by investments not being adequately diversified, but concentrated in local UAE markets. Last year, AMAN incurred an investment loss in the first half, while TAKAFUL’s investment income edged lower. However, SALAMA utilised its capital increase efficiently as it diversified its investment portfolio in both stock markets and in subsidiaries. SALAMA achieved first half investment income of AED136m against AED100m for the whole of 2005; while first half income from subsidiaries was AED43m versus AED65m for all of the previous year. SALAMA can claim to be the most diversified based on income attributable to shareholders; its subsidiaries contributed 35.2% of total income and its investments 54%. The remaining 10.8% of income derived from wakala and mudarib fees and leasing income.
The exact market shares of the three companies are hard to determine in the absence of a regulator. However, an examination of the wakala and mudarib fee-based income suggests AMAN is market leader in terms of the number of takaful policyholders in the UAE. Furthermore, the percentage of fee-based income to total shareholders’ income for AMAN was the highest, highlighting the size of its insurance operations.
Meanwhile, American International Group (AIG), the world’s largest insurer, is the latest company to offer policies compliant with Islamic principles after opening a takaful unit in Bahrain.
Its move comes as the takaful industry is booming on oil revenue pouring into the Gulf and as international reinsurers enter the market, providing the underwriting resources lacked by Islamic operations. HSBC Holdings predicts that the global market for Islamic insurance will surge fivefold to $14bn by 2015. Europe’s biggest insurer, Allianz, entered the takaful business last April, while Hannover Re started a re-takaful unit in Bahrain to provide Shari’ah-compliant underwriting services globally. Swiss Re entered the retakaful business last June, with a life reinsurance product aimed at the world’s 50 to 60 Islamic insurers.
AIG Takaful will initially serve Gulf markets, but later this year plans to expand into Asian countries such as Malaysia, and Western countries including the US and Britain.The growth potential for the Islamic insurance industry in the UAE is huge, with 96% of the population Muslim. However, the Emirates currently have only three Islamic insurance companies catering to their needs. Insurance experts suggest that growing demand for Shari’ah-compliant products makes it essential that Islamic insurance is properly promoted to convince the public of the benefits.
As the outlook for takaful business depends heavily on the stock market’s performance, intervention by regulatory bodies is necessary to monitor the risks undertaken by Islamic insurers. An independent regulatory body specialised in Islamic insurance is needed to help the sector flourish. “Many misconceptions have surfaced due to the lack of solid and reliable information about the takaful industry,” says Dawood Taylor. “Restrictions on where the takaful industry can invest have thus far limited the potential of fund managers to achieve higher investment income. Finally, more Shari’ah compliant investment vehicles need to be created in order for insurers to diversify their investments. We ourselves believe that a more liberal, hybrid model is ideal for the insurance needs of Muslims.”
Shirish Nadkarni is a freelance journalist.