Takaful Corner

The next phase of growth

Effective distribution strategies are also critical to the success of takaful and bancassurance (or “bancatakaful”) is already very popular in Malaysia, while the GCC is catching up. According to Sohail Jaffer, partner and head of international business development at the FWU Group, the most prevalent bancatakful models are:

• Islamic banks’ forming or acquiring takaful subsidiaries such as Abu Dhabi Islamic Bank having a 39.6 per cent stake in Abu Dhabi National Takaful Company

• Joint venture between Islamic banks and insurance companies wherein both the parties co-design the products and the bank is responsible for marketing and distribution such as Noor Islamic Bank and Noor Takaful

• A takaful operator acts as product designer and the bank acts as a marketer and distributor – such as Maybank distributing for Etiqa

However, companies must also adopt a “takaful mindset” and develop innovative products, according to Chakib Abouzaid, CEO, takaful Re. “Products offered by Takaful are replicas of conventional products and innovation is limited; product development is a must. Takaful companies have to bring an element of mutuality in their product offerings. Furthermore, the takaful industry is fragmented with new operators mushrooming in each market – there is a need for consolidation,” said Parvaiz Siddiq, CEO Noor Takaful.

Challenges
The outlook for the takaful industry is positive but a number of challenges remain. Shortage of expertise, increasing levels of competition, difficulty in achieving underwriting profit, high risk investment portfolios, and limited financial flexibility are the key takaful business risks in 2010, according to a survey published in Ernst & Young’s “The world Takaful Report 2010”. The report suggests that M&A activity is likely in light of the sheer number of takaful operators and the need for scale and financial strength.

There remains considerable variability of takaful operator models and approaches across different geographical markets and industry leaders such as Chakib Abouzaid have called for greater harmonisation on shari’a issues and corporate governance frameworks. Increased dialogue between regulators and shari’a scholars will help build consistency, according to Ernst & Young.

Corporate governance
The essence of the takaful concept lends itself to an ethical and transparent approach but a clear consensus has yet to emerge on the practical application of corporate governance concepts to takaful operators.  “It is extremely important for the takaful industry to ensure the implementation of corporate governance within its sector. This will ensure more transparency according to the teachings of Islam and improve overall results,” said Mohammed Iqbal Mankani, COO, Dubai Islamic Insurance & Reinsurance (AMAN) at the World Takaful conference. Takaful operators must deal with additional corporate governance challenges that conventional insurers do not face. For example, the separation of assets between the takaful operator and the takaful fund can lead to an increased principal-agent challenge as the interests of the takaful operator and the participants are not fully aligned.

Despite the requirement of the takaful operator to provide an interest-free loan to the takaful pool in the case of a deficit, the operator is protected from the downside risks, which could encourage the operator to take too many risks. Another corporate governance issue is the composition of the shari’a board and its interaction with management. Despite these areas of uncertainty, the Islamic Financial Services Board (IFSB) has published guidelines on corporate governance and the work of the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is also important.

Human resources
Qualified staff with knowledge of insurance and shari’a are scarce. It is even more difficult to find management staff and trained shari’a scholars. However, there are ongoing efforts to establish takaful education programmes – eg in Malaysia and Bahrain – which will support the industry.

Lack of regulation and standardisation
Diversity is inherent in Islam and it allows various interpretations to co-exist, hence the various takaful models. However, increasing standardisation of the operating models would help the takaful industry to grow on a global scale. The regulators in Malaysia or Bahrain have taken important steps to establish standards and enhance transparency. Standardisation will reduce costs, reduce confusion among customers and free up resources at financial institutions offering shari’a-compliant products. It is likely that some differences in interpretation will remain.

Some convergence may occur because many shari’a scholars are engaged in various companies and will apply the same judgements in different companies. However, this may lead to conflicts of interest. Also, issues such as the further development of regulations regarding the timely distribution of surpluses to policyholders, the conditions for interest free loans (qard al-hasnah), and the need to ensure separation of shareholder and policyholder pools will need to be addressed. However, some organisations are already increasing their efforts to introduce certain standards or principles. For example, the Islamic Finance Services Board (IFSB) and the International Association of Insurance Supervisors (IAIS) have been working to establish core principles that can be applied at takaful companies. The Accounting and Auditing Organization for Islamic and Financial Institutions (AAOIFIC) has also laid down accounting principles for Islamic institutions.

Available investment opportunities
Despite the rapid growth of Islamic finance and the issuance of shari’a-compliant assets, there is still a lack of tradable assets in the market. Global sukuk issuance, the Islamic equivalent of a bond, grew from US$1bn in 2001 to US$35bn in 2007. Long-term sukuks, however, are usually oversubscribed and are not traded frequently. At times takaful companies have had to invest in highly volatile regional equity or real estate markets and had fewer possibilities to diversify their risk with assets earning predictable investment returns.

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