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Yes, Takaful can remain relevant.

Byline: Mohamed Iqbal Mankani

The increasing number of takaful operators, improving financial performance, and the product innovations being tried out are proof of its relevance.


- Takaful operators will have to invest heavily in manpower, training, quality of service, and innovative products;

- In order for the takaful industry to survive and progress, competition from conventional insurers should be addressed first;

- Future growth is subject to the industry reaching a critical mass, consolidation, and harmonisation of regulatory frameworks.

The better performance of takaful operators, establishment of new companies and overall positive growth outlook are indicative of the increasing relevance and acceptability of takaful in the Middle East market.

The increasing acceptability is evident from the recent development of new takaful companies being set up.

Doha Insurance is planning to convert its Islamic branch, Doha Takaful, into a full-fledged Shariah compliant entity as part of its overall restructuring in line with the expansion plans both locally and regionally.

Abu Dhabi based Union National Bank has teamed up with Orient Insurance Company to form an Islamic insurance joint venture that will be listed on the Dubai Financial Market.

Takaful Emarat, a Dubai based Shariah-compliant life and health takaful provider, has reported 47% growth in net profit to AED15 million (US$4.1 million) for 2016.

Abu Dhabi National Takaful Co (ADNTC) has posted net profit of AED49 million for 2016, 18% higher than in 2015. In fact, ADNTC's 2016 performance marked the seventh consecutive year of continuous increase in net profit.

But, is that enough to establish that takaful will grow and remain relevant?

Growth Outlook

Moody's said in a recent report that though takaful growth will remain at double digit levels in 2017 and gross contributions will reach $20 billion globally, the annual growth will slow down from around 20% in the past couple of years to below 15% in most key markets.


The emergence of several Islamic financial institutions could present takaful operators with increasing opportunities.

But the question remains whether operators are ready to face the challenges and meet the demands of these institutions, which have an appetite for Islamic products to meet their bancassurance and bancatakaful needs.

Bancatakaful is still nowhere near the potential that is seen in the market and this is because the takaful operators have not shown the ability to design and market products suitable for Islamic banks and institutions.

However, some takaful operators have leveraged their relationship with Islamic banks and led the market with unique new products, which are sold through the bancatakaful distribution channel.

Questionable Policies

The investment policies of takaful operators come under fire. Reports are that they partly invest in non-Shariah-compliant instruments; insure risk with reinsurers instead of retakaful operators; have products that are imitation of conventional insurance with questionable authenticity and not maintaining separation of risk between shareholders and policyholders.


Takaful is facing serious competition from product developers from outside who have attractive products already designed and marketed directly to Islamic banks. All that remains to be done is to find a takaful operator who can lend its name for a small fee and issue a fronting document as an insurer.

In such cases, foreign product developers are indirectly playing the role of insurers and taking away a major chunk of the income, depriving legally operating takaful companies of their rightful market share.

The UAE regulatory authority needs to implement rules and regulations to discourage takaful operators from acting as "fronting companies".

Fronting heavily increases the exposure of the companies lending their name. The only attraction for these small takaful operators is to have some big names on their books and pretend to be the actual risk carriers.

Takaful operators should be encouraged to carry the risk to some extent and subsequently work in tandem with major retakaful operators already present locally for support. This would help the industry retain the business and generate a good volume on their books.

However, this would only be possible if takaful operators can offer a high standard of service, backed by technical know-how to manage such businesses.

Future Growth

Future growth is subject to the industry reaching a critical mass, the emergence of larger organisations through consolidation, technology adoption and harmonisation of regulatory frameworks. Though the industry has been clamouring for consolidation, looking at the results of many takaful operators, it is doubtful if they can attract sound suitors.

For takaful operators to grow, they must focus on customer centricity, innovation of new products and services, and the implementation of technological enhancements within the organisation, allowing for accurate assessment of risks while, at the same time, maintaining the core Islamic values on which takaful is built on.

An issue that has to be tackled urgently is the coordination among the board of directors, the Shariah board and the management of takaful operators.

In order for the takaful industry to survive and progress, competition from conventional insurers should be addressed first by ensuring consistency in following the underlying principles of mutuality and Shariah.

There has been a lack of differentiation between takaful and conventional insurers. Differentiating product offerings from conventional insurers has always been a challenge for takaful operators, seriously affecting the value proposition.

"The heavy competition, combined with net losses, is eroding capital strength of takaful players and damaging their credit profiles," Standard and Poor's said in a recent report.

"As takaful contracts are set up as risksharing agreements, in a larger context, the Shariah idea gets diluted when takaful operators invest fee inflows in non-Shariah-compliant financial instruments, cede their risk with conventional reinsurers instead of retakaful companies or simply lack consistency in following the underlying principles of mutuality in a takaful agreement, pressured by stiff competition on the overall insurance market."


If takaful operators intend to play a bigger role in the insurance industry, they would require:

- The necessary capital adjustments to correct the present status and to provide a strong financial base;

- Adequate risk transfer programme with substantial reinsurance support;

- Adopt best practice standards and transparency;

- Adopt and implement proper ERM practices. There have been cases where Islamic insurers have borrowed heavily from non-Islamic banks in clear violation of the concept of takaful, and the Shariah boards had turned a blind eye to this misconduct;

- Adopt prudent investment strategy. Takaful operators incurred heavy losses during the 2008 financial crisis, where many takaful operators invested as much as 80% of their capital in the stock market in spite of warnings by external auditors.
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Publication:Insurance Journal
Date:Jun 30, 2017
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