Takaful, the Islamic form of insurance, is growing quickly due to demand for Islamic financial products. It is a Sharia requirement for Takaful companies to cede to Islamic reinsurers where possible. Mairi Mallon interviews the CEO of Takaful Re.

Takaful is “exploding” and set to grow by at least 20% in the coming years as demand for financial products that comply with Islamic law grows in the Middle East. This is according to Chakib Abouzaid, chief executive officer of Takaful Re, the Sharia-compliant provider of reinsurance that was set up in 2005 by the Arab reinsurance company Arig.

He says indicators were pointed to continued growth with an explosion of Takaful start up

companies in Malaysia plus new cooperatives in Saudi Arabia. Abouzaid says that in Saudi, Takaful grew by over 50% last year and is expected to grow by a similar amount this year. He adds that more than 10 start-ups in Malaysia are also Takaful, and reacting to increased demand for the products. And this increase in demand has been following a steady trend which has seen a steep rise in Takaful and

re-Takaful (the reinsurance for Takaful companies) over the past six to ten years.

“All the new players in the Gulf Cooperation Council (GCC) area and in Malaysia are Takaful,” says Abouzaid. “In fact the growth is even more than 20%. We did an exercise and we found that the growth for the last two years is 20%. But this is for the last two years, what we need to see is what

happens in the next 10 years.

“To give you an idea why the markets are exploding, firstly we have 52 % growth in Saudi Arabia in 2007, and in the last year I think it was even more than 52% - in fact this market is growing by a minimum of 57%. It is an organic growth which is exceeding all countries’ expectations. If you add to this that all the new players in the GCC and Malaysia are Takaful, you can see that Takaful is growing by 20%, but I cannot prove it yet because we don’t have the annual report (on the 2008 figures) – but believe me it is happening.”

When Arig decided to withdraw from the direct market in 2002, it re-focused on its core business of reinsurance in the Middle East. As part of this restructuring, Takaful Re was formed, in a bid to offer Takaful companies access to Sharia-compliant reinsurance in their local market. It was then one of only three such companies offering this new service, but the expansion of Takaful has led to an increase in demand for re-Takaful reinsurance.

Takaful Re is headed up by Abouzaid, a graduate in economics of Grenoble University, France, with over 15 years of experience in the reinsurance

industry. The company was set up in Dubai to give it an identity distinct from its parent company, as well as to take advantage of Dubai’s tax status and emergence as a leading regional financial centre.

Today, Takaful Re has authorised capital of $500 million and paid-up capital of $125 million, making it one of the most financially secure re-Takaful companies in the Middle East and North Africa region. Recently, Standard & Poor’s assigned its ‘BBB’ long-term counterparty credit and insurer financial strength ratings to Takaful Re, citing strong capitalisation, a supportive shareholder base, a conservative investment portfolio, and a flexible cost base - due to an outsourcing agreement in place (Takaful Re outsources its underwriting to Arig). S&P says these positive factors are partially offset, however, by the high execution risk faced by Takaful Re, the still underdeveloped Takaful market sector, and Takaful Re’s developing competitive position.

Abouzaid says his company had grown in response to growing demand for re-Takaful products – and it was because of this that more players had entered the market. “There is a rule for Takaful companies to cede – it is a Sharia requirement – their business to a re-Takaful business. Until 2005, they were dealing with 95% of their business through conventional reinsurance because there was no re-Takaful alternative,” he says. In the 1980s and 1990s there were only two small companies dealing with re-Takaful, but neither had the capacity to provide meaningful reinsurance; and demand was so small they had to move into conventional reinsurance for the emerging markets in the region.

“We started our operation in 2005 and in fact we were followed by Hannover Re-Takaful. Now we have many more players, and of course this shows you there is a niche. The big players, the Munich Res, the Swiss Res, they are trying not to lose their market share and we are trying to offer, or to supply this demand, for Sharia-compliant re-Takaful. There has been a dramatic increase in demand since 2005, when we started, for re-Takaful.”

He pointed to Malaysia and Pakistan as countries pushing for more re-Takaful cover. “All the Malaysian (insurance) companies are trying to have 100% of their reinsurance as re-Takaful – and this was not the case three or four years ago. We have seen in some countries, such as Pakistan, where it is mandatory that 100% of the Takaful business must be ceded to a re-Takaful operator. In Malaysia it is not yet mandatory, but it is recommended by the Sharia board or by the banking regulator. But even in the Middle East the trend is to convert all the ceded business, to shift all the conventional business to re-Takaful, because now the Takaful companies cannot use the argument of lack of capacity when they are explaining to the Sharia board who are very powerful.”

In Takaful companies the Sharia board has a powerful role in how the company is run. There are two layers of compliance – the “normal” board and a regulator, plus the Sharia board which ensures that the company is complying with Islamic law.

Abouzaid says: “I am sure that in three, four even five years from now, you will see Takaful companies converting or shifting their ceded business from conventional to re-Takaful. But this does not mean we will be out of the reinsurance market. Because when you are talking about $1 billion risk, definitely we will need the international markets.”

The re-Takaful companies like Takaful Re will still struggle to find the capacity to underwrite large multi-billion dollar risks such as infrastructure or energy risks, and this still goes to London, Bermuda or the US. Abouzaid says he hopes as his company grows they will be able to continue to take on larger risks as their capital base expands and as demand continues to grow – but for the time being it must be covered by conventional markets.

“When Pakistan is talking about 100%, it is for treaty, we are not talking about 100% overall. When it comes to the energy business and we are talking about billions of dollars, we will need the international markets. We are a global business; we cannot survive in an isolated climate.

“Let us say for example a company has to cede their energy treaties, which is always small – we are talking about $50/$60 million dollars of capacity, $80 million maximum. The rest must be ceded to the international market. They are using both. They try to use Takaful, but sometimes they have constraints, in terms of rating or maybe in terms of experience. But the majority of the risk is ceded to the international market.”

When asked if re-Takaful will grow enough to be able to take on this risk, he said: “That is our aim, but it is always a chicken and egg. If we don’t sell business, we are not able to grow. If we are not to provide capacity we will not grow as well. What we are trying to do is to provide the market with more capacity, and we are doing the maximum to convince companies to convert to re-Takaful. And definitely we have. I think it is a learning curve. We have learnt form experience. Step by step we are trying to respond to all the demands of Takaful companies.

“We will not, I think, (take on some lines). If there is a space risk, there are few players who are able to price this risk, and they must go to Paris or London or to the States. But except for very special lines or huge risk, I think for 90% of business – which is our current day-to-day business – we are able to provide the capacity and even the expertise.”

He added that this expertise came because many of the re-Takaful companies, like Takaful Re,

were spin-offs with larger companies behind them. Takaful Re is still linked strongly to its parent

company Arig, but is keen to become more

independent as it grows.

“In terms of image we have to become more independent from Arig,” said Abouzaid. “On the other hand there is a cost to being independent. When we reach a critical mass, we have to transfer more. We have already transferred the marketing from Arig to Takaful Re, so we have our own marketing team.

We are supervising the underwriting through Arig, because they are implementing our procedures and our guidelines for investment and underwriting.”

Mairi Mallon is a freelance journalist.

What is takaful?

Takaful, an Arabic word meaning “joint guarantee”, is a form of mutual insurance that strictly observes the rules and regulations of Sharia (Islamic law). The Takaful system is based on mutual co-operation, responsibility, assurance, protection and assistance between groups of participants. It has to uphold the
principle of “bear ye one another’s burden”. It is often described as a form of mutual insurance and has been in practice in Arabia from the 6th century.
What is Re-Takaful? Re-Takaful (reinsurance) provides the same services as the
reinsurance industry – it shares risk with Takaful operators, in accordance with Islamic law.