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Challenges for new growth.

Byline: Budy Kubursi

Summary: American International Group has suffered from a perception of ill-health since the American government bailed it out with a multi-billion dollar injection. Budy Kubursi cites takaful as a promising engine of growth and discusses subsidiary AIG Takaful Enaya

The financial issues of American International Group Inc have not affected our insurance companies' ability to pay claims and underwrite new policies. Regulations ensure that our assets back up each policy. AIG Middle East, Mediterranean & South Asia (MEMSA) continues to serve the conventional general insurance market. AIG Takaful Enaya, was set up in 2006 as a regional entity with a vision of global expansion. Our direction has not changed. AIG Takaful Enaya continues to pursue its growth strategy and business objectives.

Global takaful has been growing at an impressive rate over the last few years. New takaful companies are being established across the globe. Existing takaful operators are starting operations outside their home countries and conventional operators are developing takaful businesses as well. The entry of international players should contribute to accelerate growth as they bring their conventional expertise and knowledge to the development of the takaful industry. There are in excess of 130 takaful operators worldwide and this will rise. With this in mind it is hardly surprising that takaful is estimated to grow by 20% per annum and potentially reach US$10 billion by 2015 (Morgan Stanley research, 2008).

Putting things into perspective, the takaful industry is small compared with the world's insurance sector as a whole. However, takaful's influence and importance extend well beyond its current size. There is substantial potential for growth in the Middle East, Asia, Europe and North America. The world Muslim population represents around 1.6 billion people, approximately 25% of the world population, of which 70% are under the age of 35. More than half of the takaful operators have established their base in the Middle East, with a large majority headquartered in the GCC, where the economy has grown by 74-twice that of 2000. The takaful market remains a major growth opportunity and the success of the nascent industry will depend on the underwriting and investment returns within the guidelines of Shariah law.

AIG Takaful Enaya is a regional company headquartered in Bahrain and regulated by the Central Bank of Bahrain (CBB), providing accident and health, and property and casualty insurance for commercial and consumer clients in compliance with Islamic Shariah tenets and principles as well as local legislation/regulation. AIG Takaful Enaya is building its strength on AIG's 85 years of experience in insurance. Takaful in the GCC represents less than 1% of conventional insurance and takaful companies represent less than 10% of the insurance companies registered in the region. Takaful is still in its infancy. Based on its development, GCC takaful could grow to become a $4 billion market. This is impressive relative to the world's industrialised countries where, according to Swiss Re, the premium growth was 2.5% in 2007. This should not be unexpected for two reasons: considerable economic growth in the region and a sizeable uninsured population.

Malaysia witnessed exponential growth in the 1990s when its takaful market took shape. The challenge is to increase awareness, as insurance penetration across the region is relatively low compared with western countries-some even label it underdeveloped. There are 15 million Muslims in western Europe. Six million Muslims in France comprise 10% of the country's population. However, one of the challenges will be to fit takaful into western financial and fiscal regulations. There is already wide divergence in the extent to which the legal and regulatory regimes of different countries address takaful. Saudi Arabia and Sudan operate a Shariah-based legal system; Malaysia and Bahrain operate a dual legal system with Shariah-based laws operating alongside common and civil laws. In countries such as the UK and France, Shariah plays no role in the legal process. The UK has recently granted an insurance licence to its first takaful company. One hopes that this paves the way for many others.

Takaful operators need to meet both sets of regulations-the insurance regulations of the country in which they operate as well as Shariah law. Is there a need for uniform or consistent regulations? Should there be a single model for achieving compliance with Islamic principles? The surplus sharing issue and the use of the different takaful models have been a constant debate within the takaful industry. Competition between mudarabah and wakalah business models is healthy for the industry. There will always be diversity in Shariah opinion.

Insurance is a locally regulated activity. The acceptance of jurisdictional legislation and compliance could be a way forward. EU countries manage to do it. Could a single Shariah authority decide on issues pertaining to the takaful industry, or should it be a platform for sharing best practice and knowledge? Only time will tell. Development of benchmarks for takaful supervisors in all jurisdictions, financial and non-financial, will add credibility and allow for the comparison of takaful operators, regardless of location and the operating model. Federating takaful associations would enable coordination between operators and promotion of best practices within the industry.

A standard business model would certainly make consumer education a lot more simple. Lack of awareness is one of the challenges of the development and growth of takaful globally. Standardisation would facilitate statutory reporting and possibly ease regulatory monitoring and some would argue greatly support the development of industry infrastructure. However, different models lead to different strengths. Competition does raise the bar. It allows for the development of related services, including IT and distribution as competitive advantage. More importantly, it gives consumers more choice. I would like to see consensus on business models. But I would like to see that operators are allowed to develop competitive advantages, so long as the industry complies with insurance legislation and its Shariah board.

It is widely accepted that Shariah scholars are in short supply. Many of the world-renowned experts serve on the boards of takaful operators who are in direct competition. This is unavoidable, but the silver lining is a consistency in interpretation and advice. A healthy relationship with recognised Shariah scholars is absolutely critical for the development of a successful takaful business model. With the guidance of our Shariah board, AIG Takaful Enaya operates under a hybrid model-utilising a wakalah model incorporating mudarabah components. To drive much of the growth, takaful needs to match the service quality of the traditional insurance market and show just as much innovation in our product development.

It is the ethical alternative and the rigorous screening of investments that will differentiate takaful from conventional insurance products, everything else being equal. AIG Takaful Enaya has its own finance and accounting function, segregated funds and investments, and a separate operating system to that of AIG's conventional operations. To benefit from conventional wisdom and expertise, AIG Enaya utilises the same back office function as the conventional operations for underwriting and claims servicing. Takaful is an accepted form of insurance in Islam. It offers an important additional means for meeting insurance needs throughout the world, not only on the grounds of religious beliefs but also as an ethical insurance alternative. But it clearly remains at an early stage of development as a recognised offering in western countries. Promoting takaful as an ethical and socially acceptable product rather than purely as Islamic would not only make profile-raising easier but should also appeal to a much larger audience.

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Publication:Islamic Banking & Finance
Date:Jan 1, 2009
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