As with conventional insurance, the takaful pool needs to be able to redistribute some of
the risk outside the pool if it is to remain viable and sustainable. Otherwise,
very large claims resulting from catastrophic events (such as heavy storms or
flooding) could cause the pool to become insolvent. Consequently, retakaful has developed in a similar way to reinsurance.
The takaful pool
redistributes some of the risk in the pool by passing a portion of the
contributions in the takaful pool to the retakaful pool. The retakaful pool
works on the same principles as takaful:
the members of the retakaful pool (other takaful pools/funds) make contributions into the pool to
mutually guarantee each other. The participants in a retakaful contract are the takafuloperators, acting on behalf of the respective takaful pools they represent.
THE FUTURE OF THE TAKAFUL INDUSTRY
A report by Ernst & Young in 20131 commented
that ‘there is a dearth of takaful operators
who are capable of providing leadership to the growing internationalisation of
the industry. There is a need for large, regional champions to lead growth in
regional markets and to participate in international markets’.
There are signs of change. In this 2013 publication,
Ernst & Young reported that global gross takafulcontributions are estimated to be around $15 billion
in 2014, growing at more than 15 per cent per annum.
Momentum seems to be building in takaful’s three key markets – Saudi Arabia, Malaysia and UAE.
Saudi Arabia accounts for approximately half of the Islamic insurance industry,
partly due to the fact that conventional proprietary insurance is not permitted
in the country. The growth lever for strong growth in Saudi Arabia and UAE
(specifically Abu Dhabi) was the implementation of the compulsory national health
insurance policy. Qatar is also legislating to make it mandatory to hold a
national health insurance policy, which will drive demand of its takaful industry. Malaysia, with a relatively developed
Islamic finance industry, has actively supported the growth of its takaful sector. In fact, Malaysia has emerged as the
world’s largest family takaful market. With a proven model and regulatory
clarity, the country is set to further build on this leadership position.
Family and medical takaful are the major business lines across all markets.
Scale in the protection space is very important and
this has been a challenge outside of Saudi Arabia and Malaysia. Regulatory
enhancements are also presenting new opportunities in rapid growth markets such
as Turkey and Indonesia. The challenge is to build on the lessons learned from
core Islamic finance markets to address rising demand expeditiously.
Takaful is in many ways the ‘sleeping giant’ of the
Islamic finance industry. As highlighted at the beginning of this chapter,
protection against the risks we face as human beings is a basic need. With the
significant and growing Muslim demographic across the world, a tremendous
opportunity exists to provide sharia-compliant
protection solutions. Conventional insurance still dominates across the Muslim
world (in a report by Swiss Re in 2011, 83.1 per cent of premiums went to
conventional insurance providers in Muslim countries2)
and in most of the non-Muslim world there is very little provision of takaful.
For the takaful industry
to compete with conventional proprietary insurance, it needs to achieve scale,
a more accessible regulatory framework, have suitable long-term investments for
the family/life takaful market and attain operational efficiency. Scale
is important to overcome significant start-up costs, provide competitive
pricing and mitigate the risk of insolvency. Regulation in individual
jurisdictions and the regulatory framework across borders need to be simplified
to allow larger, regional players to develop. A lack of relatively stable,
long-term sharia-compliant investments has been an issue – these are
needed to match the long-term nature of family/life takaful plans and the fact that these plans have a
strong investment focus. Instruments such as longer-term sukuk are
required to support the growth of the takaful industry.
World-class standards of operational efficiency are required to compete
effectively with the well-established conventional insurance market.