This section explores the latest trends in the rapidly burgeoning global takaful (shari’a-compliant insurance) market which is estimated to eventually grow to between US$7bn (Swiss Re estimate) and US$15bn (Takaful Re estimate) by 2015.

When surveying the global Islamic insurance market in its broadest sense (i.e. including the Saudi Arabian and Iranian models), takaful contributions worldwide grew 25 per cent from US$7.5bn in 2007 to US$9.4bn in 2008, according to figures released by Takaful Re. The DIFC-based retakaful player expects a similar level of growth to have been recorded in 2009.

This was mirrored by an increase in the number of Islamic insurance companies to 190 worldwide, with the highest regional concentrations in the GCC (77 operators) and the Far East (37 operators), followed by Africa (29) and Iran (18) – according to the World Islamic Insurance Directory 2010. However, despite efforts to systematically compile reliable and consistent statistics about the sector, there is still significant divergence between sources and the methodologies used.

Nevertheless, it is clear that growth in the takaful sector continues at a healthy pace and certainly faster than the conventional insurance sector. Speaking at the World Takaful Conference in Dubai in April, Dr Saleh Malaikah, CEO of takaful giant SALAMA, concluded that the Islamic financial services sector as a whole had weathered the worst of the financial crisis in 2009 and emerged relatively unscathed. The announced delay of Dubai World’s debt repayments in November 2009 – specifically concerning the maturation of the US$3.5bn sukuks issued by its real estate subsidiary “Nakheel” – tested the credibility of the Islamic financial services sector but did not rock its foundations.

The fortunes of the takaful sector are largely intertwined with those of the growing Islamic banking sector, with a recent report from Standard & Poor’s noting that assets of the top 500 Islamic banks reached US$822bn in 2009. The long-term growth drivers for takaful are similar to those of the Islamic banking sector in that favourable demographics (including young and rapidly growing Muslim populations), increasing affluence (particularly in the GCC) and a growing desire for shari’a-compliant options will fuel demand.

“The greater availability of organised savings solutions, financing and mortgage products create a natural demand for family takaful (Islamic life insurance) which is likely to grow at a relatively faster pace than general takaful,” said Malaikah. However, growth patterns in the MENA region are proving to be quite distinct from those seen in the Far East where family takaful is making faster headway.

According to estimates from Takaful Re (based on 2008 data), the split of total takaful contributions in the MENA region by lines of business are: family and medical (49 per cent), motor (24 per cent), property and accident (18 per cent) and marine and aviation (nine per cent).

In contrast, family and medical lines of business in the Far East account for as much as 71 per cent of total takaful contributions, followed by motor (14 per cent), property and accident (13 per cent), and property & accident (two per cent). The split is more even on a global level with motor accounting for 37.5 per cent and family and medical accounting for 36.1 per cent.

New opportunities
Commercial takaful penetration remains low, even in key markets such as Malaysia and Saudi Arabia. According to a report from Swiss Re: “The market for large corporates and commercial businesses offers significant opportunities for takaful, particularly for investment projects handled by Islamic banks. This segment is currently insured by conventional insurers in most cases.” This view was echoed by Sandeep Sachdeva, global head of Amanah Commercial Banking, HSBC Amanah, who said: “The commercial segment should form a significant part of takaful’s growth plans. There are approximately 900,000 SMEs in KSA and 600,000 SMEs in Malaysia… takaful penetration in these remains miniscule”.

Microtakaful schemes are also seen as an effective means of reaching out to vast underinsured populations in many Muslim countries. “Microtakaful can be effective even in markets with little experience of takaful, as long as products, procedures and policies are simple, the premiums are low, the administration is efficient and distribution channels are innovative,” said Shahril Azuar Jimin, CEO, Etiqa Takaful Berhad.

First Takaful Insurance has been put on credit watch by Standard and Poors following profitability concerns.

S&P is monitoring the Kuwait-based insurer’s BBB- counterparty credit and financial strength after its annual results for 2009 “raised concerns” about future earnings.

Wolfgang Rief, S&P credit analyst, said the rating action mainly reflects the agency’s view of the “deteriorating underwriting performance of the takaful fund, poor investment results for both members and shareholders, and diminished growth in a very difficult economic and competitive environment”.

He added: “It also reflects our uncertainties about management’s strategy and measures to restore profitability and regain growth momentum.”

S&P will now ascertain more insight into how the company is responding to the challenging dynamics of the market and what strategies and measures it plans to implement to achieve improvements.

It expects to resolve the credit watch status within the next 90 days.

Rief added: “If we decide to downgrade the company, the rating change is unlikely to exceed one notch.”

Islamic insurance, or ‘takaful’, is an alternative to conventional insurance and offers a shari’a-compliant option that may also appeal to those looking for an ethically driven insurance provider.

Takaful is an Arabic word meaning “guaranteeing each other”

When it comes to conventional insurance, there is a general consensus among Muslim scholars that there are contradictions with essential elements of an Islamic financial contract. A takaful contract must be based on principles of cooperation, protection and mutual responsibility, but must avoid acts of interest (riba), gambling (al-maisir) and uncertainty (al-gharar).

Although there is not one preferred or standard operating model for takaful insurers on a global scale, shari’a scholars generally agree on certain fundamental components that are required to be an accepted takaful company. However, operational differences are tolerated as long as there is no contradiction to any essential religious tenets.

Togetherness in striving for the common good
Participants agree to reciprocally guarantee each other against certain loss or damage that may be inflicted upon any of them. This embodies the principle of mutuality, solidarity and brotherhood among the participants in striving for common good.

Establishment of a shari’a board
An essential component in a takaful company’s corporate governance is the establishment of a shari’a board, in addition to the conventional board of directors. The shari’a board is made up of Islamic scholars, who ensure the company’s operational model, profit distribution policies, product design and investment guidelines comply with Islamic principles.

Restricted investments
Shari’a compliance refers not only to the operational structure of the company, but also to its investment policy. Takaful companies must avoid investing in traditional fixed-income securities (due to the coupon interest payment attached). Instead, they are allowed to invest in sukuk (or Islamic bonds, where coupon payments take the form of a profit share on a particular enterprise). Moreover, investments in stocks (in principle allowed) should avoid the financing of non-Islamic activities (such as alcohol or gambling).

Establishment of two separate funds
A takaful (or policyholders’) fund and an operator’s (or shareholders’) fund. The takaful fund operates under pure cooperative principles, in a very similar way to conventional mutual insurance entities. Underwriting deficits and surpluses are accrued over time within this fund, to which the operator has no direct recourse. As a result, the takaful fund effectively is ringfenced and protected from default of the operator’s fund.

Management expenses and seed capital are borne by the operator’s fund, where the main income takes the form of either a predefined management fee (to cover costs) or a share of investment returns and underwriting results (or a combination of both).

Solidarity principle and surplus distribution:
Given the fact that the takaful fund is seen as a pool of risks managed under solidarity principles, it is not meant to accumulate surpluses at levels excessively higher than those strictly needed to protect the fund from volatile results and to support further growth. Likewise, any fees or profit shares received by the operator should be just sufficient to cover management and capital costs while keeping the company running as an ongoing concern.

In case of financial distress for the takaful fund, the operator is committed to provide it with an interest-free loan, Qard’ Hasan, for however long it is deemed necessary – providing an additional layer of financial security to the participants.

The surplus distribution structure is expected to be managed carefully and in a balanced way, so that neither policyholders nor operator make excessive profits at the expense of the other party.

Dr Omar Clark Fisher explores the alignment of corporate governance and company performance in relation to takaful companies, while calling for a far more active role for policyholders in the decision-making process.

Corporate governance and company performance

From board rooms to regulators’ offices and to stock exchange trading floors, the global debate marches on: does good corporate governance enhance stock prices and/or shareholder value? While research studies are by no means conclusive, evidence is mounting up that better corporate governance leads to better future financial and stock performance. According to the Policy Brief published by the Hawkamah Institute for Corporate Governance, “In its September 2005 report, ‘The Irresistible Case for Corporate Governance,’ the International Finance Corporation (IFC) asserts that sound corporate governance increases company valuations by 20-30 per cent in developing markets and leads to higher credit ratings and a corresponding improvement in access to finance.”

A Wilshire Report in July 2009 documented statistically the positive impact of good corporate governance on share prices of 139 public companies that the California Public Employees’ Retirement System (CalPERS) invested in beginning in 1987 and thereafter insisted they adopt corporate governance policies and best practices. Compared to a benchmark return on cumulative basis, average companies invested into by CalPERS yielded three per cent per annum higher, or a five-year excess return of 15.3 per cent. Significantly, Wilshire found that institutional investment by CalPERS and the upgrading of corporate governance led within one year to “targeted poorly performing companies to underperform by only 1.5 per cent vs. a massive 23.6 per cent underperformance just one year prior.”

Another finding of the Hawkamah Institute is that: “Shari’a-compliant insurance companies need to explain clearly the relationship between the policyholders’ fund and the operating company. In particular, shareholders need to know what their obligations will be to support the policyholders’ fund in the event that the fund faces financial difficulties. Disclosure should focus on the legal relationship between the two entities, and also disclose any regulations to which the takaful firm is subject, which may affect the flow of funds between the two entities.”

Dr John Lee, executive director at KPMG, commented in June 2009 on Exposure Draft No 8 from the International Financial Services Board (IFSB) of Malaysia regarding corporate governance for takaful companies: “Because of structure of Islamic finance, the need for transparency is even greater than perhaps in conventional. The fact that participants have a direct stake in some of these transactions, I think that’s why there’s so much emphasis on the need for transparency. So who’s looking after the interests of policyholders? Some would argue that perhaps it’s the shari’a board…but a lot of the role of the shari’a board has been confined to product development areas as opposed to looking at broader issues such as fairness to policyholders.”

Although worldwide there are four variations of the basic system of takaful, the Islamic alternative to conventional insurance, common elements are apparent. Succinctly put, these are:

. Insureds make contributions (often called “tabar’ru or donations) rather then
pay premiums
. Core essence is mutual assistance to needy members of the group (or ta’awun)
. Risk-sharing among members (form of joint indemnification) rather than risk transfer
. Avoidance of prohibited elements such as al maisir (form of gambling), al gharar (uncertainty and deception) and al riba (interest or forbidden types of commercial gain)
. Separation of ownership interests of policyholders (members) from shareholders
. Use of Shari’a compliant agreements in all activities – including investment of contributions and share capital
. Excess funds resulting from annual operations – called surplus not profits – legally belongs solely to policyholders (who after all contributed the risk capital) and not to shareholders, as is featured by stock insurance companies.

Based on points listed above, five observations arise.

Misalignment of shareholders’ and policyholders’ interest
With the exception of several cooperative risk pools in Sudan, the takaful models employ an organisational structure whereby shareholders assert themselves as “agents” for the policyholders through Mudareb or Wakala arrangements.

This arrangement is typically legitimised by the voluntary purchase by the policyholder/member of a takaful operator’s policy. However, many takaful policies are frankly oblique in terms and conditions, and may not fully disclose rights, responsibilities and fees attendant to this arrangement. Hence, the first important observation is the rights, responsibilities and role of policyholders are not always clearly set forth and readily disclosed in ads, brochures, websites, let alone in actual policy wordings.

Common practice under good corporate governance requires that customers (read policyholders/members) be provided clear, unambiguous and easily accessible descriptions of rights, responsibilities and other consumer protection disclosures, today circumscribed by normal business practices – especially in financial services. No doubt in reaction to the recent global financial crisis, regulators and insurance practitioners alike are giving more attention to transparency and disclosures.

Secondly, nearly all takaful operators establish themselves as managers of the risk pool with no consultation with policyholders – the main beneficiaries of that risk pool. Of the various policies the author has read, not one specifies how policyholders can appoint management or even remove management. It seems their sole recourse is to lapse their policy, or to terminate the policy early if aggrieved or somehow poorly represented by their “agent”, the takaful operator. Again, good corporate governance practices among stock companies generally (including insurance) sets forth the manner in which customers (read policyholders) can complain, influence business management or in extreme cases, mount an appeal to the board via a proxy campaign or via legal recourse called “class action suit” to impress upon management its grievances.

Thirdly, on a slightly more technical point, the calculation of surplus at year-end is conducted by shareholders only through management with no consultation (again) with policy holders. The decision about retaining surplus, adding to reserves or size and timing of distribution of funds is totally determined by the takaful operator. Some industry experts take comfort in the Sharia Supervisory Board’s oversight of takaful business operations, which does include this issue of surplus calculation. Nonetheless, surplus is the right of policyholders who have contributed that risk capital to the takaful pool. Good corporate governance should dictate that policyholders be actively involved in such calculation and decision-making, rather than resort to a “watch-dog” status for scholars or discovery through a shari’a audit, which is still not a regular and respected fixture of takaful operations globally.

Financial crisis forces founders of a Bahraini-Qatari joint venture to postpone its launch.

The launch of Al Jasr Takaful Insurance Company has been postponed due to unfavourable economic conditions, it has been revealed.

Shaikh Nawaf Bin Mohammed Bin Jabr Al Tani, chairman of the founders’ committee, announced the delay during a recent meeting in Doha. He said the changing business and investment environment caused by the economic downturn had prompted the decision.

No timeframe for when the Bahraini-Qatari joint venture will be established was given. It was originally set to launch this year, with 60 percent of the company to be sold through an initial public offering by 2012.

Al Jasr Takaful Insurance would have been capitalised at $68.7 million on inception.

Tokio Marine Holdings establishes takaful units with joint venture partner.

Marine and fire insurance provider Tokio Marina Holdings Inc is one of the latest international companies to establish takaful units in Africa following a spate of Egyptian-led Islamic bond launches.

Tokio, in partnership with Egypt Kuwait Holding Co (EKH), set up the Nile Family Takaful Co and Nile General Takaful Co last month. The companies have a 40% and 60% holding respectively.

Shares in the takaful units are capitalised at $5.5 million each.

With an authorised capital of US$500 million, EKH is one of the largest private equity holding companies in the Middle East and Africa.

The joint venture partners expect the units to reap $3.48 million in annual contributions during the first financial year, rising to $137.3 million within 10 years.

The Egyptian Insurance Supervisory Authority (EISA) is proactively supporting the development of Egypt’s fledgling takaful sector and recently licensed a wave of new operators to join exisiting players such as Wethak for Takaful Insurance Company, Solidarity for Family Takaful Insurance and Egyptian for Takaful Insurance Company.

KUALA LUMPUR

Islamic financial services industry set for improved “soundness” and “stability” following IFSB ruling in Kuala Lumpur.

During the 15th meeting of the council of the Islamic Financial Services Board (IFSB) in Kuala Lumpur, three documents were approved that aim to further facilitate efforts towards enhancing the soundness and stability of the Islamic financial services industry. (1) Guiding Principles on Governance for Islamic Insurance (takāful) Undertakings (IFSB-8).

IFSB-8 seeks to provide guiding principles on governance for all takāful undertakings under each respective jurisdiction’s purview. The document has the following three main objectives; a) reinforcing relevant good governance practices; b) striking a balance between the interests and fair treatment of all stakeholders; and c) providing a solid foundation for all IFSB’s future standards that relate to good governance of takāful undertakings.

(2)  Conduct of Business for Institutions offering Islamic Financial Services (IFSB-9)
IFSB-9 aims to promote a climate of confidence and a supportive environment in the business of the Islamic financial services industry.

(3)  Guiding Principles on shari’a Governance System (IFSB-10) IFSB-10 aims to highlight to supervisory authorities in particular, and the industry’s other stakeholders in general, the components of a sound shari’a governance system.

Plans to launch a Takaful joint venture, involving Qatar Islamic Bank, broker Beema and Italian insurer Assicurazioni Generalli, are underway.

Italan insurer Assicurazioni Generali, Qatar Islamic Bank (QIB), and broker Beema are looking into forming a joint venture in the takaful sector. QIB chairman, Sheikh Jassim bin Hamad bin Jassim bin Jabr Al Thani, said: “QIB is delighted to look into the possibilities of establishing strategic partnerships in the takaful business with a view to create a leading takaful player. Our plans are to launch the takaful products in the GCC countries first, giving priority to our local and regional markets, and then place a particular focus on geographic areas which are relevant to takaful.”

Generali CEO, Sergio Balbinot, said: “Our group gives a strategic value to Takaful products in the light of demographic, economic and insurance factors. One quarter of the world population is Muslim and 60 per cent of Muslims are under 25. Islamic countries produce 23 per cent of the wealth generated by emerging markets, although their insurance penetration indexes are still low.”

This section explores the latest trends in the rapidly burgeoning global takaful (shari’a-compliant insurance) market which is estimated to eventually grow to between US$7bn (Swiss Re estimate) and US$15bn (Takaful Re estimate) by 2015.

To the casual observer the Islamic insurance market has been a series of positive stories over the last few years. There has been an explosion in the growth of takaful operators, with a number of the major insurers entering the market, including Allianz, AIG, Munich Re and Hannover Re. Premium growth has been staggering, with some players reporting growth of 50 per cent or more over the last few years.

Has the current economic climate taken the shine off these developments? There is no doubt that the relative security of the investments used to underpin a takaful operators’ funds, which inevitably differ from those used by the conventional insurance market due to the requirements to comply with shari’a, has been a focus of debate in recent months. Profit margins have been eroded as a consequence of the dependence (some would say over-dependence) on equities and real estate and the shortage of long-term liquid investments.

There have also been calls for renewed focus on producing technical underwriting profits. However, there is no doubt of the potential for growth of the takaful industry with roughly 1.5 billion Muslims around the world being underserved by the insurance sector, coupled by the fact that many markets in which takaful would be attractive to consumers in the Muslim world have traditionally low penetration rates for insurance, takaful is rightly seen as an Islamic financial product with a bright future.

At the World Takaful Conference held in Dubai in April, Ernst & Young presented their report focused on the future of takaful. It was reported that by 2012, total takaful contributions could reach US$7.7bn per year. Even higher projected growth had previously been reported. HSBC, for example, estimated the global takaful market will be worth US$14.4bn by 2010. The growth is spectacular when one considers takaful contributions (premiums) were reported as being US$1.4m per year in 2004 rising to an estimated US$3.4bn in 2007, the majority of those contributions coming from within the GCC with south-east Asia following behind.

In a sea of statistics, many of which are often contradictory, it is helpful to remember simply that global takaful contributions are less than one per cent of the total insurance premium spend annually, despite the fact that Muslims are 24.79 per cent of the total global population. Inevitably there are questions as to what proportion of this population is accessible to insurers. The fact remains that in key markets, such as the Middle East, insurance penetration remains low. It is estimated that the UAE is massively under-penetrated with insurance premiums in 2007 being reported as 56 per cent below GDP-adjusted levels in the non-life sector and 88 per cent in the life sector.

A brief history of takaful
The world’s first takaful company, the Sudanese Islamic Insurance Company was established in 1979. Since then, to date it is reported that there are about 124 takaful companies as of January 2009 and 38 takaful windows (ie, conventional insurers undertaking takaful business through a “window”, which allows for safeguards and separation of contributions and assets).