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Progress report.

Summary: Islamic Business & Finance takes a look at the highlights from Ernst & Young's World Takaful Report

The fifth edition of Ernst & Young's World Takaful Report 2012: Industry Growth and Preparing for Regulatory Change, confirms that global Takaful contributions grew by 19 per cent to $8.3 billion in 2010. Of these, the GCC contributed $5.68 billion and South East Asia contributions were $2 billion. In 2010, growth in the GCC slowed to 16 per cent, from a CAGR of 41 per cent in 2005-2009, as the implementation of compulsory medical Takaful in Abu Dhabi and Saudi Arabia was completed earlier.

Ashar Nazim, MENA Head of Islamic Financial Services, Ernst & Young, said, "The Takaful industry continued to show double digit growth in 2010, albeit at a relatively slower rate of 19 per cent compared to previous years. Among key markets, Malaysia and the UAE again achieved growth rates of over 24 per cent, while Saudi Arabia saw its gross contributionsincreaseby$0.5billion."

SAUDI ARABIA LEADS MALAYSIA AND UAE IN MARKET SIZE Saudi Arabia remains by far the largest Takaful market, contributing $4.3 billion or 51.8 per cent of the industry at an average contribution per operator of $141 million. Malaysia grew 24 per cent to reach contributions of $1.4 billion at an average contribution per operator of $141 million. The third rank is held by the UAE with contributions of $818 million, growing at 28 per cent. Sudan is the most significant market outside of the GCC and Southeast Asia, with contributions totalling $363 million, growing by seven per cent in 2010.

"With current growth trends, and the addition of new fringe markets such as Indonesia and Bangladesh, we expect gross contributions of $12 billion by 2012," said Ashar.

While most operators agree that the new regulations are a positive development, they are concerned over increased variances in regulatory regimes across jurisdictions


The Islamic finance share in the GCC and Malaysia is 25 per cent and 22 per cent respectively whereas the Takaful market share is 15 per cent and 10 per cent respectively. In terms of consumer segmentation, the Shari'ah appeal of Takaful makes it predominantly retail driven in most markets. The corporate business is attracted through a value proposition based on the operators' reputation, history, product suite, service standards, relationships and pricing and this segment has significant room for growth.

Gordon Bennie, MENA Financial Services Industry Leader, Ernst & Young said, "The GCC Takaful market predominantly comprises of general Takaful business with family Takaful accounting for as little as five per cent in certain markets. With high disposable income average and low market penetration, the GCC presents great potential for family Takaful. Focus on customer research to understand needs and expectations, in addition to focus on customer education and distribution capacity-building would allow this market to be tapped. Large Muslim markets such as Libya, Egypt, Bangladesh, Indonesia and Brunei are opening up to Takaful."

Saudi Arabia remains by far the largest Takaful market, contributing $4.3 billion or 51.8 per cent of the industry


Insurance companies continued to yield higher returns with an average return on equity of eight per cent in the GCC compared to the Takaful operators with four per cent. Operators in Saudi Arabia have struggled to show positive returns since the financial crisis. The local market is currently dominated by three players, with the remaining operators incurring high expense ratios and loss ratios in their efforts to gain market share. Though the combined operating ratios of Malaysian Takaful operators are better than their conventional peers, the reverse is true for the GCC.


Strong competition, evolving regulations and shortage of Takaful expertise are identified as key risks in both the GCC and South East Asia.

Young Takaful operators are relying upon aggressive pricing strategies to compete against the established, older, conventional players. Such pricing is not sustainable and causing significant pressure on the industry's profitability. There are increasingly stringent regulatory requirements on capital and solvency, indicating the regulators' desired future direction.

While most operators agree that the new regulations are a positive development, they are concerned over increased variances in regulatory regimes across jurisdictions. Such variances make it difficult for Takaful operators to function across regions and also lead to confusion for customers and multinational insurers.

"Industry consolidation would allow Takaful operators to compete effectively with larger, more established conventional insurers and also reduce unhealthy price wars. However, the industry is still growing rapidly which is keeping shareholders interested in their Takaful operations. The industry will take a bit more time to establish itself before it can be decided which players can sustain themselves and which cannot," concluded Ashar.

Summary of key Takaful events

Significant events in the Takaful industry during March 2011 - March 2012

Regulatory events

GCC & MENA B ahrain

AAOIFI ruling on underwriting surpl us

AAOIFI amended their ruling on sharing of Takaful surplus made five years ago. The ruling continued to refrain shareholders from sharing in the underwriting surplus. However, the AAOIFI Shari_a Appellate Bench (SAB) has proposed to allow surplus participation with the management team of the Takaful operator. A performance fee of up to 30 per cent may be taken out of participant surplus for the management.

SA & SEA Paki stan

SECP issued draft Takaful rules 2012

Securities and Exchange Commission Pakistan issued draft Takaful rules proposing significant changes in the Takaful regulatory framework. The changes shall allow conventional insurance companies to open Takaful windows.

SA & SEA Malaysia SA & SEA

Bank Negara Malaysia issued draft risk-based capital framework for Takaful operators

The draft risk-based capital framework aims to address solvency requirements described in the IFSB "Standard for Solvency Requirements in Takaful Undertakings".


Oman set to allow Takaful operators

Oman's Capital Market Authority (CMA) allowed Takaful products. The CMA is in the process of finalizing the regulations and standards required for Takaful operations.

SA & SEA Malaysia Takaful Operational Framework

Malaysia's Takaful Operational Framework_ came into effect in January 2012. Its objective is to enhance Takaful business efficiency, ensure healthy and sustainable Takaful funds and safeguard participant's interest.


Bancassurance regulations update

The Insurance Authority issued a circular in September 2011 to all insurance and Takaful companies in the UAE setting out guiding rules which UAE insurance and Takaful companies should adhere to in distributing products through banks.

Business events

SA & SEA Malaysia

Tokio Marine sold its stake in Hong Leong Bhd

Tokio Marine sold all shares in its Malaysia Takaful joint venture, Hong Leong Tokio Marine Takaful Bhd.,to its local partner Hong Leong Group.

GCC & MENA Bahrain

Allianz sold 75% of its Takaful business to Medgulf

Allianz Takaful sold 75 per cent shares to Medgulf for Bahrain and Qatar markets.

Source: Ernst and Young research and analysis

GCC & MENA Bahrain

Global events affecting Takaful

A number of political and economic events being witnessed around the world are likely to impact the Takaful industry


The European crisis has dampened the prospects of Takaful making gains in that market. Increased solvency requirements add to the difficulty of launching Takaful, given the risk structure of Takaful and the favourable treatment of debt instruments in the capital adequacy calculation. It may also limit the appetite of European insurers for investing overseas, as the new rules apply at a group level as well as at insurer level.


The Arab Spring has hurt the attractiveness of populous Muslim markets such as Sudan and Tunisia for foreign investment. Specifically Libya and Egypt were considered as high potential growth markets. A number of projects have been postponed or at least affected due to the prevailing situation in these countries.

Saudi Arabia

The Saudi Arabian Monetary Authority (SAMA) had directed all operators to align with the cooperative insurance model by year end 2011. Takaful operators had to adjust their internal accounting structures, remove the use of Wakala and Qard and amend product terms and conditions. Saudi is a huge Takaful market and this shift away from the pure Takaful model may have various affects on the industry which is already in need of regulatory harmonisation.


Sudan is the largest Takaful market outside the GCC and Malaysia. The recent partition has resulted in the creation of two countries. Oil rich but under developed South Sudan does not support Islamic finance and Takaful. North Sudan only allows Islamic Finance and Takaful. However, the partition has resulted in a steep drop in North Sudan's GDP growth due to loss of oil revenues. Overall slowdown of economy and reduced FDI will directly impact the growth of the financial sector, including that of Takaful.

South East Asia

Indonesia is emerging as a significant Takaful market, overtaking several of the GCC countries in Gross Written Contributions (GWC). Along with Malaysia and Brunei, the other two important Takaful markets in South East Asia, the region accounts for $2 billion in total GWC.

With Saudi regulators disallowing the pure Takaful model, the primary hub for Takaful may well shift from the GCC, to South East Asia.

Source: Ernst and Young research and analysis

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Publication:Islamic Business & Finance
Geographic Code:7SAUD
Date:May 17, 2012
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