Global Takaful market could touch $7.7bn in 2012, reports Ernst and Young

Saudi Arabia, with contributions totalling $1.7bn in 2007, and Malaysia, with $797m, are the top two Takaful markets worldwide. The report was unveiled at the Annual World Takaful Conference 2009.

Takaful, or Shari'a compliant cooperative insurance, has been expanding by tapping into large Muslim markets globally. However, there are still significant untapped markets in Asia and the Mena region. The GCC, Malaysia and Sudan are the top three markets for Takaful while the Indian Subcontinent, Indonesia, Egypt and Turkey, remain the least penetrated Muslim markets.

Compared to the reported losses of almost $350bn of conventional insurers and government supported enterprises in the Americas, Europe and Asia, the Takaful market has largely shown resilience in the current economic downturn.

However, the last quarter of 2008 has seen a decline in the returns-on-equity of major Takaful operators. As a consequence, Takaful operators are increasingly concerned with the strategic, operational, compliance and financial risks they face today.

New challenges, new risks:

Omar Bitar, Managing Partner, Advisory Services, Ernst & Young Middle East, said:

"The global downturn has affected everyone and Takaful is not immune. Takaful operators now need to better manage their costs in a more challenging market as the risk landscape has changed substantially. Investment portfolios, human resource expertise and competition will be their most pressing business risks over the coming 12 months. Operators will also need to reassess their core business, move away from a reliance on high-risk investment returns, and focus on achieving underwriting profit."

Ernst & Young's report recommends that to counter high-risk investment portfolios, Takaful operators need to enhance their portfolio management capabilities and improve risk-adjusted returns. This risk for the operators is an opportunity for asset managers, who need to address the unique risk-return profile of Takaful operators.

To deal with human resource expertise risk, operators are advised to focus on developing local talent and partnering for quick market entry. Hiring indigenous talent and providing structured internal training programs helps to create a development culture and reduces turnover. For conventional insurers, partnering with established local operators can provide existing infrastructure and access to Shari'a compliance expertise. For local Takaful operators, international insurers provide expertise in risk management and specialist lines of business.

Opportunities ahead:

Favorable demographics, increased income earnings, the propensity to consume and changing social attitudes towards insurance are the fundamental long-term demand drivers of Takaful. A young population in core Takaful markets will need more coverage as government subsidies decrease and more families require private coverage. Regulatory support and framework, insurance legislation and compulsory coverage will facilitate its growth in the medium term.

The window of opportunity in the coming 12 months rests on operators capitalizing on increased alliances, cross selling and BancTakaful, product innovation, multiplying their distribution channels, mergers and acquisitions and expansion in underpenetrated emerging markets.

According to Sameer Abdi, Head of Ernst & Young's Islamic Financial Services Group, "Takaful markets now span much of the globe but there still exists a large, expanding and untapped Muslim population on almost every continent. We estimate that the global Takaful market could be as high as $7.7bn by the end of 2012."

"The ensuing recession has tempered growth forecasts in almost every region and sector, including major Takaful markets. Takaful operators who can successfully adapt their business models and mitigate against changing business risk will have opportunities to expand through acquisition activity. They will benefit in the long-term from strong demographic growth, rising income levels and a growing desire to consume Shari'a compliant products," concluded Sameer.