UAE seen driving global takaful
market to $8.8b

DUBAI — Driven by the UAE and Indonesia, the world’s fastest growing markets for Islamic insurance, the global takaful industry is well on course to surpass $8.8 billion in contributions in 2010, a report by Ernst & Young
said on Monday.

By Issac John

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Published: Tue 13 Apr 2010, 11:15 PM

Last updated: Mon 6 Apr 2015, 9:36 AM

Contributions grew by 29 per cent in 2008 to reach $5.3 billion. Takaful refers to Shariah compliant cooperative insurance, Ernst & Young’s World Takaful Report 2010 unveiled at the 5th Annual World Takaful Conference taking place in Dubai, said.

More than 350 international delegates gathered at the event that kicked-off on Monday to work towards new strategies for managing risks and driving growth for the Takaful industry in light of the new economic realities that are emerging in a changing business landscape.

The UAE is the fastest growing takaful market in the world with a compound annual growth rate of 135 per cent from 2005-2008 while Indonesia rose quickest in South East Asia at 35 per cent.

According to the report, Saudi Arabia, with contributions totalling $2.9 billion in 2008, and Malaysia with $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 $280 million in 2008.

“Globally, performance has been mixed. Yields realised by GCC operators have been comparably high but volatile, while Malaysian operators have posted stable returns driven by better underwriting results,” said Sameer Abdi, Head of Ernst & Young’s Middle East Islamic FinancialServices Group.

Growth of takaful industry in the GCC at 45 per cent outpaced the global compound annual growth rate at 39 per cent. The Levant region and Africa grew at 18 per cent, the Indian Subcontinent at 135 per cent, South East Asia at 28 per cent.

In terms of operating efficiency, average combined ratios of GCC firms have continued to improve and reached 72 per cent in 2009 (latest year for which data is available), indicating improving operational efficiency, said Abdi.

“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.”

According to the report, compulsory medical insurance requirements in Saudi Arabia have contributed to growth in family and medical takaful, which, together, is estimated to bring in 49 per cent of gross contributions in the MENA region.

Family takaful is estimated to provide only 5 per cent of these total contributions. South East Asia is the most highly penetrated family and medical takaful market bringing in 73 per cent of net contributions in 2008. Contributions from family takaful in this market are much higher and accounted for 73 per cent of net contributions in Malaysia in 2008.

The report suggests strong future growth in the MENA region on the back of high rates of real GDP growth, decreasing government safety net, coupled with low insurance penetration and favourable demographics.

“While industry growth remains strong, the challenge for operators is to balance profitability through their early years of development,’ it said.

“It’s worth noting that most takaful operators are yet to achieve critical business volume, despite incurring substantial establishment costs over the years,” said Abdi.

Most takaful firms are startups or small players with limited access to quality business. It is important that they rethink their go-to-market approach if they want to achieve critical mass and become sustainable in the long run, he said.

Abdi argued that 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 offers strong business growth, but the real challenge is growth with profitability”, said Abdi. “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.”

Abdi said in GCC, he expected some consolidations across several markets over the next three years, leading to the creation of financially stronger market leaders.—

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