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.

Demand for Takaful prompts Islamic finance provider’s expansion drive.

Salama Islamic Arab Insurance has opened two new branches in the UAE as part of a “major” Middle East expansion drive, the company revealed on Tuesday.

The Islamic insurance provider said demand for Takaful products had prompted an increase in branches across the emirates from four to six.

Dr Saleh Malaikah, vice chairman and CEO of Salama, confirmed that a further two would be added before year-end.

“The launch of these new branches is a major step towards accomplishing our vision to emerge as a dominant player in the regional Islamic insurance market,” he said. “We are also ramping up our presence significantly and will expand to eight branches by the end of 2010.”

The company is listed on the Dubai Financial Market with a paid-up capital of $300 million. It has BBB+ and A- ratings from Standard & Poor’s and AM Best respectively.

An A.M Best report says local insurance markets will experience steady but restricted growth.

Low population numbers in GCC countries is restricting the scale of growth throughout the region’s insurance markets, an A.M Best Co report has claimed.

The credit rating agency also said “fierce” competition among local insurers was hampering growth in some segments.

“Foreign insurers and reinsurers are aware of the opportunities the GCC offers in comparison with the West’s stagnant insurance markets. However, competition, particularly among local insurers, remains one of the biggest challenges to companies operating within the GCC,” said Yvette Essen, head of market analysis for A.M. Best’s global financial services division.

Not having the capacity to rely solely on investment income to shore up balance sheets in light of the unstable equity markets is another challenge that insurers face, according to Essen.

But Essen, the author of A.M Best’s GCC: Rich in potential but hurdles remain report, insisted insurers were well placed to ride out the ongoing global uncertainties.

“The companies in the region, in general, are well capitalised – A.M Best downgraded just one GCC insurer in 2009. The region’s insurance growth rate has moderated since the downturn, but no absolute drop in business has been noted.”

An increase in personal line business across some GCC markets is expected once compulsory motor and health insurance cover are introduced. Meanwhile, A.M. Best believes development of the Takaful industry could exceed steady growth levels from the past two years.

Overseas insurers and reinsurers will continue looking for opportunities to establish a presence in the GCC, leading to greater competition, takeovers and joint ventures.

The report also said that diversification of product lines through life and family products could improve profitability.

Ernst & Young reveals huge Islamic insurance growth in emirates.

The UAE and India were the biggest growth markets for Islamic insurance during a three-year period, an Ernst & Young report has revealed.

A 135 per cent compound annual growth rate for takaful was registered across the emirates and India between 2005 and 2008 – 100 per cent more than the 35 per cent increase experienced in Indonesia.

Meanwhile, the Gulf recorded 45 per cent growth during the same period.

According to the report, takaful contributions will exceed $8.9bn this year compared to $5.3bn in 2008.

Saudi Arabia and Malaysia were the two biggest takaful markets for revenue in 2008, generating $2.9bn and $900 million respectively.

But despite some markets reporting strong figures two years ago, the report said generating profits remained a challenge for most countries.

It added that the GCC and Malaysia’s takaful industries faced several challenges, including risk, technical results, investments, operational efficiency and retention.

With insurance market growth of 26 per cent between 2005 and 2008, the region’s insurance sector has made significant progress, but it still has room for improvement, according to Peter Vayanos & Roger Kastoun of Booz & Company.

In the past three years, policy makers and regulatory authorities have made progress in promoting the growth, competitiveness and development of the insurance industry in the Middle East and North Africa (MENA) region. As the industry looks to build on this success, several key challenges will need to be addressed to sustain growth and bring the region in line with developed insur­ance markets around the world, according to a new study by Booz & Company.

The foundation is set
Aided by regulatory authorities’ efforts, the MENA region’s insurance market saw 26 per cent compounded annual growth between 2005 and 2008, which was sur­passed only by Central and Eastern Europe’s 27 per cent growth rate. In 2008, the market in the UAE was the largest in terms of Gross Premium Income (GPI), representing more than US$5bn, followed by Saudi Arabia with US$3.1bn and Morocco with US$2.5bn. Bahrain, Algeria, and the UAE showed the strongest GPI growth rates between 2007 and 2008, at 46 per cent, 45 per cent, and 41 per cent, respectively.

But there is still room for improvement: “The MENA region’s share of the world market accounted for just 0.42 per cent last year. Furthermore, insurance penetration – GPI as a percentage of gross domestic product – remains low in the MENA region,” said Peter Vayanos, a partner at Booz & Company. This ratio grew to 1.08 per cent in 2008 from 1.05 per cent in 2005, but paled in comparison to every other major region of the world.

The MENA region’s progress to date
In 2006, Booz & Company introduced a framework to assess the development of insur­ance in the region, identify gaps, and prescribe a set of policy recommendations to be adopted. The framework was based on five key market “enablers”: a legal frame­work, regulatory bodies, the nature of competition, skills and training, and market-led initiatives. “The industry has made significant progress in addressing these issues, although some critical gaps still exist,” stated Roger Kastoun, a senior associate at Booz & Company.

Legal framework: Having a robust legal framework in place protects the rights of policyholders, regulates the activities of market participants, and ensures the financial health of the sector; several countries have improved or expanded their legal frameworks.

Regulatory bodies: Regulatory bodies are needed to oversee and supervise the sector, and ensure the enforcement of laws and regulations. Today, the region remains a patchwork of sophisticated and underdeveloped regulatory regimes, with Bahrain leading in terms of regula­tory oversight.

Nature of competition: Innovation, competitive pricing, and the adop­tion of best practices are all natural outcomes when countries welcome free competition in their insurance market. “Today, most MENA countries have more than 20 insurers in operation and are keen on attracting foreign players. Some markets, however, are still dominated by state-owned or partially state-owned companies,” Vayanos commented.

Skills and training: An adequate insurance knowledge base helps assess the risks to be insured, provides cus­tomers with the appropriate products and services, and ensures the avail­ability and development of locally-based skills. Two recent initia­tives have helped to address knowledge gaps: The Gulf Insurance Institute (GII) was established recently in Bahrain. In Qatar, the Qatar Financial Centre (QFC) established a training institute offering accredited courses in several specialist areas, including banking, insurance and wealth management.

Market-led initiatives: A vibrant insurance market should be able to stand on its own two feet, with little government intervention. Some markets have attempted to foster the availability of insurance market data and conduct consumer awareness campaigns to promote a better understanding of the market and help attract talent. Insurance market data, however, is largely unavailable. Similarly, limited coordination among policymakers at the regional level is causing key issues to slip through the cracks.

Booz & Company has identified four critical objectives that regulatory bodies should prioritise to enjoy sustained growth in the coming years: building the talent base, improving public awareness and acceptance of insurance, fostering the development of takaful and coordinating efforts to harmonise insurance mar­kets in the Arab world.

Building talent
“One of the most notable developments in enhancing insurance skills and training in the region was the establishment of the Gulf Insurance Institute (GII) in 2007, which offers accredited insurance certificates and a membership system,” Kastoun stated. Furthermore, the Bahrain Institute of Banking and Finance (BIBF) offers a professional insurance certificate that is administered in more than 11 countries. In 2008, the BIBF launched a new takaful certification programme accredited by the Chartered Insurance Institute (CII), the first such certification in the world.

Insurance company registers healthy revenues for the Middle East in 2009.

AXA has revealed a Middle East profit surge for 2009, despite operating in tough economic conditions throughout the year.

The company registered a $40 million net income after generating $445 million from gross written premiums, an 8.6% rise compared with 2008.

All AXA operations across the GCC reported double-digit growth ranging between 15% and 26%, apart from the UAE, which suffered a slight drop. While business in Abu Dhabi was up 26%, Dubai registered an undisclosed decline.

Jean-Louis Laurent Josi, CEO AXA Insurance Gulf and Middle East, attributed the company’s growth to employee and customer satisfaction, market support and a resilient business model.

Josi said that attempts by competitors to snatch market share “by aggressive means” would make 2010 another challenging year.

But he promised AXA would respond by developing its products, retaining existing and attracting new customers and offering good rates to claims-free clients.

On the Middle East’s likely best insurance markets for 2010, Josi said: “We see growth coming from countries like Kingdom of Saudi Arabia where we have established our new cooperative company and were recently granted a license by the Saudi Arabian Monetary Authority to sell our products there.

“We will also push for growth from the rest of the other countries where we already have our presence.”

In 2009, AXA paid out $289 million to policyholders and satisfied 60% of car flood claims arising from severe flooding in Dubai.

Demand for insurance in the region continues to rise on the back of widespread structural developments.

Huge investment in mega projects throughout the Middle East has spurred growing demand for insurance policies, a leading financial expert has claimed.

While addressing delegates at the inaugural World Space Risk Forum in Dubai on Tuesday, Ahmed Humaid Al Tayer, Governor of the Dubai International Financial Centre, said: “The region’s huge programme of infrastructure spending on energy, water, transportation and petrochemicals is creating mega projects that require insurance and reinsurance services.”

He also said changing attitudes towards risk and structural changes had fed long-term insurance industry growth in the Middle East and North Africa.

Al Tayer said taking state assets private had led to several previously uninsured operations requiring insurance cover. A move by local governments to encourage people to save for retirement by introducing compulsory insurance for non-life risks had also fed the industry’s growth, he added.

His comments came during the World Space Risk Forum, an event that attracts figures from the space industry to discuss risk management and insurance for the sector.

While most insurance-related industries had suffered during the financial crisis, Al Tayer insisted space insurance remained strong and healthy after weathering the storm.

“Demand for satellite communication capacity continues to grow as new TV, radio, internet and mobile telephone services are launched and new earth surveys for pollution, resources and disaster monitoring are implemented,” he added.

Government projects have fuelled growth for local insurers, but the Kuwati government will look to build on this in 2010.

Market size
Gross written premiums (GWP) in the Kuwaiti market hit KWD180.41 million in 2008, according to the Union of Insurance Companies (Kuwait) – see page 13 for a breakdown of premium by national v foreign insurers – but no further premium growth is expected in 2009.

Non-life business accounted for around 80 per cent of overall market premiums, while life and medical had the remaining 20 per cent. Motor is the largest line of business at 31 per cent of market premium, followed by marine and aviation (13 per cent) and fire (11 per cent).

The Kuwaiti government’s energy and infrastructure projects have fuelled growth for local insurers, but the government can do more to facilitate growth, according to Tariq Bin Ghaith, secretary general of the Union of Insurance Companies (Kuwait).

Speaking at the Gulf Insurance Forum in November 2009 in Bahrain, Gaith called for the introduction of legislations for insuring government properties. He also identified challenges facing the market including: the need to establish an independent insurance regulator to exercise more control over the sector, the importance of limiting the award of licenses to new insurance companies (there are 29 insurers serving a small market) and addressing the low prices of compulsory third-
party insurance.

Competitive conditions
National companies dominate the market in Kuwait, accounting for 82 per cent of total gross written premiums (GWP) written. The lion’s share of this is commanded by a handful of industry leaders: Gulf Insurance Company (GIC), Kuwait Insurance Company, Al-Ahleia Insurance Company and Warba Insurance Company. The big four collectively account for around 70 per cent of total premiums, with GIC the market leader with GWP of KWD48.6m (24.7 per cent market share) in 2008.

There are 19 national insurers in total (up from 15 in 2007), including a relatively high concentration of takaful players that entered the market over the past few years including: AIN Takaful and Al Safat Takaful. The influx of new takaful players has created an intense level of competition and place severe pressure on premium rates in certain classes.

Kuwait’s 12 takaful operators accounted for nearly 20 per cent of market premium in 2008 and more than 11 per cent of the overall life business, according to the Union of Insurance Companies (Kuwait). First Takaful is the leader in the takaful segment with GWP of KWD6m (23 per cent takaful market share), followed by National Takaful and GIC’s takaful unit.

What are classified as “Arab” and “foreign” insurance companies have made little impact in the market with a mere 18 per cent of market premium. There are only three foreign insurers operating in Kuwait (including: ALICO and New India Insurance) and seven Arab insurers including: Al-Ittihad Al-Watani Insurance, Al Daman Insurance and Lebanese Suisse.

Recent developments
An established and competitive market cannot disguise the fact that Kuwait’s insurance regulatory framework lags behind the rest of the GCC countries. Current legislation dates back to 1961 and established local players have been vocal in their criticism of the limited control exercised over new players, particularly with low capitalisation requirements of KWD150,000 for local insurers and KWD225,000 for foreign companies. Reform is on the way though with a draft insurance law in the pipeline that could significantly raise capital requirements (between KWD15m and KWD20m) and introduce monitoring schemes to manage the risk of insolvency. The law would bring Kuwait’s outdated regulatory framework in line with international standards.

Regulatory overview
Insurance regulator: Ministry of Commerce and Industry – Insurance Department (MOCI)
Governing legislation: Insurance Law 24 of 1961
Capital requirements: Branch and locally domiciled insurer – KWD10m (US$34.4m).
Foreign ownership restrictions: Branch – 100 per cent foreign ownership permitted
Locally domiciled insurer – foreign ownership could vary between 49 per cent and 100 per cent depending on the stance adopted by the Kuwaiti Investment Committee.

Only insurers licensed in Kuwait are permitted to write direct Kuwait risks. There is no restriction on foreign companies writing reinsurance of Kuwaiti cedants. There are no restrictions on composite insurance currently in place in Kuwait.

Reports indicate that a new insurance law has been prepared and sent to the Fatwa and Shari’a department for approval. The law is likely to increase the capital and deposit requirements for branches and subsidiaries, which may be doubled to KWD20m.

Regulatory overview provided by Clyde & Co

Al Ittihad’s improving capital position is rewarded with a B+ rating.

AM Best Co has assigned a financial strength rating of B+ (Good) and an issuer credit rating of “bbb-” to Al Ittihad Al Watani (L’Union Nationale) Societe Generale d’Assurances du Proche Orient sal (Al Ittihad) (Lebanon). The ratings of Al Ittihad reflect its improving capital position, robust underwriting performance and good business profile. Offsetting factors include its weak investment strategy and underdeveloped risk management framework.

Al Ittihad is a Lebanese-based insurer with branches in the UAE and Kuwait, concentrating mainly on motor and medical business. AM Best expects Al Ittihad to continue to grow within its key markets, between 10 to 15 per cent in each of the next two years, with gross premiums written expected to be in excess of LBP110bn (US$75m).

Al Ittihad’s pretax profits were US$5m in 2008 and technical profits of US$5.85m. A.M. Best expects Al Ittihad’s combined ratio to remain below 90 per cent over the next two years. Conversely, Al Ittihad’s investment performance has been weak (with returns consistently below four per cent), given its historic concentration in private equity and real estate assets.

Policy spoke to Walid Sidani, CEO of Abu Dhabi National Insurance Company (Adnic), about the company’s ambitious plans for the future.

This year marks a new phase in Abu Dhabi National Insurance Company’s (ADNIC’s) evolution, with the completion of a rebranding exercise and ambitious new leadership. Walid Sidani took the helm as CEO in March – having previously spent 14 years with AIG in the US, Egypt and the UAE – and is looking to build on the company’s dominant position in the UAE market.

With gross premiums of AED1.36bn and net profits of AED250m in 2008, Adnic is the second-largest player in the UAE, though by far the leading risk carrier in Abu Dhabi. The firm underwrites a significant chunk of the mega projects taking place in the emirate and boasts a bursting portfolio of aviation and marine business, although this has been slightly affected by the global slow-down.

Nevertheless, the company is well placed to weather the economic storm and continues to justify its stable “A-” rating from Standard & Poor’s. Gross premium levels in the first quarter of 2009 were maintained at AED552.5m (up from AED546.9m for the same quarter last year) while underwriting income stood at AED114.6m – virtually the same as last year. However, investment income fell to AED4.9m compared to AED139.7m during the first quarter of 2008. Sidani has placed a strong company focus on carefully micro-managing the investment aspect of the business, but with proper governance in place. A new investment team has been created, comprising members of the board and independent investment experts.

With a solid foundation in place, Adnic is targeting further expansion in specialised business including environmental liability – as it relates to major projects and chemical manufacturing – as well as building on its expertise in infrastructural and transportation-related risks. Takaful is also an emerging segment that the company may consider, with Sidani able to draw on his tenure as vice-president and COO of AIG Takaful.

Expanding reach
Strategic partnerships form a cornerstone of the company’s long-term expansion plans. Earlier this year, Adnic launched its new medical insurance product “Shifa” in partnership with Vanbreda International – the global health plan administrator – to offer coverage across 192 countries and more than 10,000 medical service providers worldwide.

The next initiative on the horizon is a joint venture with a Lloyd’s underwriter which will be based at the Dubai Financial Centre – subject to the approval of the Dubai Financial Services Authority.

“Blending the technical and underwriting experience of the London market with Adnic’s local strength and presence could be a potent combination in the future. Adnic is already a leader in aviation in the UAE and transportation in many emerging markets is big business, as well as entertainment and environmental management. Our joint venture will help us capitalise on these opportunities,” Sidani adds.

However, ADNIC will not be rushing into regional expansion too quickly as it focuses initially on enhancing the existing capabilities and infrastructure of its four-branch network in the UAE, although Sidani expects the company’s first new regional footprint to be made in the next two years.

Reinvigorated approach
ADNIC has encapsulated its strategic priorities into three key themes: expansion, modernisation and positioning itself as an employer of choice. Underpinning the company’s growth plans is a commitment to strengthening the internal infrastructure, processes, IT capabilities (a more web-enabled facility is being put in place) and ability to deploy products quickly, Sidani says.

Sidani is particularly passionate about positioning Adnic as “a true magnet for talent” that places a strong focus on training and succession planning. More than 12 per cent of the company’s workforce comprises local Emiratis, a ratio that compares favourably with other local insurers. “Talent acquisition and management are the fundamental challenges for Adnic and the wider industry. We place great emphasis on the way we train, reward and retain talent, but at an industry level, I feel we could all do more to attract young people to the industry. This could even begin at school level through summer internships to stimulate interest in a career in risk management,” Sidani adds.

Describing his leadership as fostering “accelerated evolution”, Sidani feels privileged to be part of Adnic’s future and is looking forward to celebrating the firm’s 37-year anniversary in September.