The 5th edition of Ernst & Young’s “World Takaful Report 2012: Industry Growth and Preparing for Regulatory Change,” unveiled at the 7th Annual World Takaful Conference 2012, confirms that the global Takaful contributions grew by 19% to $8.3 billion in 2010. Of these, the GCC contributed $5.68 billion and South East Asia contributions were $2 billion. In 2010, growth in the GCC slowed to 16%, from a CAGR of 41% in 2005–2009, as the implementation of compulsory medical Takaful in Abu Dhabi and Saudi Arabia was completed earlier.
Ashar Nazim, MENA Head of Islamic Financial Services, Ernst & Young, said: “The Takaful industry continued to show double digit growth in 2010, albeit at a relatively slower rate of 19% compared to previous years. Among key markets, Malaysia and the UAE again achieved growth rates of over 24%, while Saudi Arabia saw its gross contributions increase by $0.5 billion.”
Saudi Arabia leads Malaysia and the UAE in market size
Saudi Arabia remains by far the largest Takaful market, contributing $4.3 billion or 51.8% of the industry at an average contribution per operator of $141 million. Malaysia grew 24% to reach contributions of $1.4 billion at an average contribution per operator of $141 million. The third rank is held by the UAE with contributions of $818 million, growing at 28%. Sudan is the most significant market outside of the GCC and SE Asia, with contributions totalling $363 million, growing by 7% in 2010.
“With current growth trends, and the addition of new fringe markets such as Indonesia and Bangladesh, we expect gross contributions of $12 billion by 2012,” continued Ashar.
Takaful’s untapped potential
The Islamic finance share in the GCC and Malaysia is 25% and 22% respectively whereas the Takaful market share is 15% and 10% respectively. In terms of consumer segmentation, the Shari’a appeal of Takaful makes it predominantly retail driven in most markets. The corporate business is attracted through a value proposition based on the operators’ reputation, history, product suite, service standards, relationships and pricing and this segment has significant room for growth.
Gordon Bennie, MENA Financial Services Industry Leader, Ernst & Young said: “The GCC Takaful market predominantly comprises of general Takaful business with family Takaful accounting for as little as 5% in certain markets. With high disposable income average and low market penetration, the GCC presents great potential for family Takaful. Focus on customer research to understand needs and expectations, in addition to focus on customer education and distribution capacity-building would allow this market to be tapped.”
“Large Muslim markets such as Libya, Egypt, Bangladesh, Indonesia and Brunei are opening up to Takaful,” added Gordon.
Generating profitability remains a challenge
Insurance companies continued to yield higher returns with an average return on equity of 8% in the GCC compared to the Takaful operators with 4%. Operators in Saudi Arabia have struggled to show positive returns since the financial crisis. The local market is currently dominated by three players, with the remaining operators incurring high expense ratios and loss ratios in their efforts to gain market share. Though the combined operating ratios of Malaysian Takaful operators are better than their conventional peers, the reverse is true for the GCC.
Business risks hinder industry profitability
Strong competition, evolving regulations and shortage of Takaful expertise are identified as key risks in both the GCC and South East Asia.
Young Takaful operators are relying upon aggressive pricing strategies to compete against the established, older, conventional players. Such pricing is not sustainable and causing significant pressure on the industry’s profitability. There are increasingly stringent regulatory requirements on capital and solvency, indicating the regulators’ desired future direction.
While most operators agree that the new regulations are a positive development, they are concerned over increased variances in regulatory regimes across jurisdictions. Such variances make it difficult for Takaful operators to function across regions and also lead to confusion for customers and multinational insurers.
“Industry consolidation would allow Takaful operators to compete effectively with larger, more established conventional insurers and also reduce unhealthy price wars. However, the industry is still growing rapidly which is keeping shareholders interested in their Takaful operations. The industry will take a bit more time to establish itself before it can be decided which players can sustain themselves and which cannot,” concluded Ashar.
1 Takaful refers to Shari’a-compliant cooperative insurance.
2 CAGR – Compounded Annual Growth Rate