Takaful Markets Face Challenges

Though global takaful contributions are set to grow at a double digit rate, the industry is still small compared with the world's insurance sector. Yet its influence and importance far exceeds its current size, and there is substantial potential for growth both in Muslim communities in the Middle East and Asia, as well as in more mature markets (e.g. the UK and other European countries), which have significant Muslim communities.

The main takaful markets are located in the Middle East and South-East Asia, with Africa accounting for a small percentage of total premiums. The major contributors in term of gross contributions are from Iran (64 per cent), Saudi Arabia (17.6 per cent) and Malaysia (7.7 per cent). Many of the multinational insurers that are expanding into this sector are located either in Bahrain or Malaysia, where the required infrastructure is in place, and where they have been particularly proactive in developing the necessary legal and regulatory environment.
The increasingly rapid economic development of countries with sizeable Muslim populations and their current low insurance penetration rates provide some of the potential growth momentum for the future. The Muslim population worldwide exceeds 1.5 billion, of which Muslim countries represent about 25 per cent of the world's population, but account for only about five per cent of global insurance premiums.
In addition, the potential switch of existing insurance purchases from conventional insurers to takaful operators could also drive the growth trend. This is coupled with the increasing consumer awareness of takaful, heightened Islamic consciousness and the development of legal and regulatory structures within a number of jurisdictions - all of which have created a more transparent environment for takaful operators to establish business effectively.
The increasing issuance of sukuk bonds globally has also broadened the investment opportunities available for takaful. With such positive trends in the sector, its future growth potential might go beyond the Muslim communities, where takaful can be marketed as 'ethical' protection providers to customers of all faiths.
Takaful firms face a number of challenges. Given the operational differences between takaful firms, such as the usage of different takaful models, a careful assessment of the protection offered to participants is needed in each case. In particular, the development of a clear and precise legal and regulatory regime to govern the segregation of assets between the takaful operator and those of the participants is one of the most important challenges, in Fitch's opinion, to further enhance confidence in the industry.
The future success of the industry depends a lot on the ongoing efforts and commitments initiated by various takaful firms to develop a viable and transparent market place, whereby consumers are able to judge effectively the value provided by takaful as compared to conventional insurance.