The third edition of Ernst & Young’s World Takaful Report 2010: Managing performance in a recovery, unveiled at the 5th Annual World Takaful Conference of 2010, confirms that global Takaful industry is well on course to surpass US$8.8 billion in contributions in 2010. Contributions grew by 29% in 2008 to reach US$5.3 billion. Takaful refers to Shari’a-compliant cooperative insurance.
Saudi Arabia and Malaysia are biggest markets
Saudi Arabia, with contributions totalling US$2.9 billion in 2008, and Malaysia with US$900 million are the top two takaful markets in the world. Sudan is the most significant market outside of the GCC and SE Asia, with contributions totalling US$280 million in 2008.
UAE and Indonesia are fastest growing markets
Global compound annual growth rate for takaful for the period 2005 - 2008 has been 39%; the Levant region and Africa grew at 18%, the Indian Subcontinent at 135%, SE Asia at 28% and the GCC at 45%. The UAE was the fastest growing takaful market in the world with a compound annual growth rate of 135% from 2005-2008 while Indonesia rose quickest in SE Asia at 35%.
Generating profitability remains a challenge
According to Sameer Abdi, Head of Ernst & Young’s Middle East Islamic Financial Services Group, “Globally, performance has been mixed. Yields realized by GCC operators have been comparably high but volatile, while Malaysian operators have posted stable returns driven by better underwriting results. In terms of operating efficiency, average combined ratios of GCC firms have continued to improve and reached 72% in 2009 (latest year for which data is available), indicating improving operational efficiency. The figures seem to indicate that while the industry may seem to be temporarily bogged down by market troughs, the long term outlook seems very positive.”
Family and medical takaful continues to grow
Compulsory medical insurance requirements in Saudi Arabia have contributed to growth in family and medical takaful which, together, are estimated to bring in 49% of gross contributions in the MENA region. Family takaful is estimated to provide only 5% of these total contributions. SE Asia is the most highly penetrated family and medical takaful market bringing in 73% of net contributions in 2008. Contributions from family takaful in this market are much higher and accounted for 73% of net contributions in Malaysia in 2008. Both family and medical continue to grow strongly, with the MENA region following the growth trends witnessed in SE Asia.
Comparatively high rates of real GDP growth, decreasing government safety net, coupled with low insurance penetration and favorable demographics, suggest strong future growth in the MENA region.
Opportunities are plenty, so are risks and challenges
While industry growth remains strong, the challenge for operators is to balance profitability through their early years of development. Unsurprisingly, the primary challenge remains the shortage of skilled professionals across all key functions – underwriting, risk management, claims management and technology deployment.
Underwriting losses remains a source of worry for most operators and specialization could be the answer. Enhancing their understanding of the customers, sectors or geographies, and therefore improving their risk analysis and pricing could yield quick results.
Sameer says: “It’s worth noting that most takaful operators are yet to achieve critical business volume, despite incurring substantial establishment costs over the years. Most takaful firms are startups or small players with limited access to quality business. It’s important that they rethink their go-to-market approach if they want to achieve critical mass and become sustainable in the long run. A lot of priority should be given to controlling operational costs. For example, outsourcing arrangement for back-office operations can make a sizeable difference in creating leaner and more efficient operations”
Distressed asset values and challenging capital markets are some of the other challenges that the industry faces given the impact of the global financial crises.
The road ahead
“The road ahead offers strong business growth, but the real challenge is growth with profitability”, says Sameer. This is in the backdrop of the basic underwriting capacity at many of the takaful operators, the impact of which has been exacerbated due to heavy losses on the investment portfolio.
The report also draws attention to the governance system. The role of Boards will become increasingly decisive in steering companies towards recovery. As a result, many operators have initiated a rigorous review of their strategies and financial plans. Capital generated internally through profitable operating performance will be critical to maintaining financial stability and funding growth.
“We are entering a new and changing world, where quality of strategy execution and stronger capital planning are at the top of the management agenda. The industry has certainly shown resilience during the global financial crises. It’s about time that the industry lobbies for deeper local Islamic capital markets and diversifies its business mix in favor of areas with sustainable growth potential,” adds Sameer. Ernst & Young’s Islamic Financial Services team are deeply involved in assisting many takaful businesses in GCC and international markets in building a stronger takaful franchise.
“Locally in GCC, we expect some consolidations across several markets over the next three years, leading to the creation of financially stronger market leaders.
For international conventional insurers pursuing a growth agenda in emerging markets of Middle East, North Africa and Asia, takaful model has certainly been of interest. Successful investment for these companies lies in clearly understanding the local market practices and correspondingly choosing the right takaful model, mode of market entry and local partners,” concludes Sameer.
