Takaful Corner
Potholes In The Streets Of Gold?
| January 21, 2010 by Clyde & Co
But if surplus is not returned questions arise as to what the difference is between the takaful model and conventional insurance? Should an eminent scholar pronounce an opinion on this matter similar to that which was provided for the sukuk market, it is easy to see that the credibility of takaful would be under threat.
Genuine shari’a compliance?: The use of conventional policy wordings by takaful operators has also led to questions about the shari’a compliance of certain products. Given the relative youth of the takaful industry and the comparative longevity of the conventional insurance industry, and the need to appeal to consumers who are familiar with conventional insurance products, it is perhaps understandable that insurance wordings used successfully within the conventional insurance market for many years, are seen as a useful template or starting point from which to develop takaful wordings.
However there are some issues with this approach and some matters that need to be carefully thought through in producing takaful policy wordings. There are some risks that cannot be insured (new for old in home contents policies for example). There is also a serious question as to whether certain key elements associated with conventional insurance contracts could work in a takaful context such as moral hazard, as well as an insured’s duty of disclosure and whether claims handling should be different (the use of technical defences being a particular concern). Other relevant considerations include how remedies would work and whether there is scope for bad faith to impact within a takaful policy. Finally it is always important to consider the impact of the interaction with local laws and regulations.
Shari’a scholars and qualified personnel: One common theme for the Islamic finance sector as a whole, is the need for further shari’a scholars to assist the growing Islamic finance and takaful industry.
It is important that there is a meeting of the minds of both shari’a advisers and takaful operators in relation to the nuances at play when developing a potential product, and the relevant shari’a considerations that would apply to such a product. A current challenge for the takaful industry to overcome is to ensure that shari’a scholars fully appreciate and comprehend the commercial purpose of products on offer. This is so they can advise in respect of the shari’a- compliance aspects in a way that both allows takaful operators to undertake their business with certainty, and ensures the shari’a compliance and credibility of the product. The chronic shortfall of scholars for the Islamic finance industry as a whole, is compounded in takaful, where there are few scholars with any genuine depth of understanding of the insurance market.
In addition, another perennial problem faced by the Islamic finance industry as a whole is the lack of qualified staff and sales people who actually appreciate and understand the product sufficiently to explain it to consumers (to whom the concepts are likely to be new). It is hoped that as the Islamic finance industry as a whole, including takaful, grows, this problem may be alleviated as further experience is accumulated within the market. Both the lack of scholars and qualified personnel can only be resolved by the takaful industry investing in people. As the size and number of takaful operations grows, it is hoped this issue will fall away.
Incentivising consumers and providing products relevant to the consumer’s demographic: Another challenge important for the takaful industry to overcome is reaching out consumers in providing products that are relevant and appealing to the consumer market. The countries targeted for takaful growth are based mainly within the Muslim world, where insurance penetration rates are traditionally low, particularly in respect of life insurance. There has not been a culture of incentivising consumers by providing, say tax breaks, or encouraging private-sector savings as may be found in western countries. Further, in contrast to the ageing populations of the west where the focus may be in providing adequately for retirement, the demographic within Muslim countries, and especially the Middle East, is a youthful population. The challenge will be to ensure that takaful products appeal to this new generation and appear relevant to them.
Family takaful (or the takaful equivalent of life insurance) is a particular area in which further growth is expected as it currently remains underdeveloped. The possibility of developing Microtakaful (which would provide insurance coverage for low-income individuals with the idea of making cheaper risk coverage affordable for a much wider audience) is widely speculated as providing another opportunity for great growth in developing markets as a more economical alternative to mainstream takaful.
Distribution channels: Finally, there will need to be a development of distribution channels, particularly if the takaful industry is to succeed in penetrating into personal lines such as family takaful.
Internet sales and bancassurance (or bancatakaful) are likely to be of increasing importance to the industry. Bancassurance in particular is widely recognised as an important platform for takaful operators to reach out to potential consumers through their chosen banking provider. However, both internet sales and bancassurance generally currently faces some regulatory hurdles and lack of regulation in the GCC is a major issue. There remains in the UAE, considerable uncertainty as to the validity of bancassurance in strict keeping with the current insurance legislation, and legislative reform is required if the necessary protections for consumers and the industry’s need for certainty are to be resolved.
Cause for optimism
Despite the challenges highlighted in this article, there is certainly great cause to be optimistic regarding the future of takaful and its huge potential for growth. Across the Middle East, the current level of GDP per capita is not currently reflected in the insurance penetration rates. As highlighted above, life insurance remains particularly undeveloped and the opportunity for family takaful to step into this role is extremely viable.
Despite the challenges facing the takaful industry, there is no reason why it should not succeed to be the future means by which many more Muslims and non-Muslims around the world seek to protect their lives, health, possessions and businesses.
