The secret of Takaful's success

With Takaful House joining the Dubai Financial Market, the fourth provider of Islamic Insurances or Takaful entered Dubai's local stock exchange.

Throughout the GCC, Takaful operators emerge like mushrooms, and Western insurance and re-insurance companies are tapping the market as well.

While the global volume of Islamic investment approaches $1 trillion, global Takaful is currently estimated to total $4bn to $5bn.

Developing from a relatively small volume, the Islamic insurance industry is growing at 25% p.a. - a faster pace than the overall Islamic Finance industry (which is growing at an average of 15% to 20% p.a.). The market will soon reach $14bn according to HSBC.

How Takaful works

Takaful is an Arabic term which means 'guaranteeing each other'.

Paid-in premiums are pooled, and if one member of the insured community suffers a loss so does the whole community.

But Takaful insurance does NOT eliminate Gharar or uncertainty, as often stated. Gharar is considered as haram under Shariah, beside Riba (interest) and Maysir (speculation, e.g. day-trading or short-selling).

In a conventional and in an Islamic insurance Gharar is not eliminated since the insured person does not know if he will ever benefit from his contract.

So what makes Takaful different from, or even preferable over conventional insurance? This is where Ta'abarru plays an essential part in Takaful (and why many scholars do not agree with it).

Because the risk portion of the pool, which represents the mutual/cooperative principles in Takaful, is paid with Ta'abarru, rather than just a 'plain' premium, Shariah scholars agree that the elements of Al Gharrar in Takaful can be forgiven, (but never avoided).

Finally, the paid-in premiums are not invested in financial products which are haram, such as conventional interest-bearing bonds or stocks from the alcohol, tobacco, weapons, or entertainment industries.

Takaful boom set to continue

Despite many operators entering the market, the potential is still huge.

This is assured by the boom in Islamic Finance in general. Muslims seek to put faith into finance in all aspects of the daily life, which complements with the Islamic principle of Tauhid or unity.

Further, with an insurance density of around $14 per capita, the Middle East is one of the most underinsured regions in the world.

This is why even Western insurers have identified Takaful as an opportunity to enter untapped markets.

Since 2006 Germany's Allianz SE has been offering Takaful in Indonesia, the world's most populous Muslim nation. In the same year, AIG launched its Bahrain-based Takaful company Enaya. Swiss Re, Allianz Re and Munich Re have all entered the Re-Takaful market in recent years as well.

Partnerships are also on the rise, such as the one between Bank Al Jazira and insurance giant Prudential: They founded a new Takaful in the UK a year ago.