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Growth potential remains high for global takaful industry


Islamic insurance sector grew by 16 per cent in 2012, a noticeable moderation from a 22 per cent CAGR between 2007 and 2011.

October 24, 2013 9:57 by

According to Ernst and Young’s (EY) latest report, Global Takaful Insights 2013: Finding Growth Markets, key regions continue to offer growth prospects with low market penetration rates, however wider opportunities have been identified in emerging markets.

Takaful in most regions is in its infancy stage and its potential to replace conventional insurance in leading Islamic finance markets is still largely untapped.

The report also finds that in order for the industry to maintain its growth trajectory, there is a need for larger regional players who can provide leadership for building capacity and to address a number of business risks that executives cite as challenges to the takaful sector as a whole.

Presently, Saudi Arabia, the UAE and Malaysia lead the industry with their relatively well-developed Islamic finance industries, including Sukuk markets, strong customer reach and competitive pricing. The role of authorities in simplifying regulatory frameworks across borders and encouraging consolidation will also be key in propelling the industry’s expansion.

Ashar Nazim, global islamic finance leader at EY, says: “Takaful operators must adopt a clear strategy and capital plan that includes both organic and inorganic growth, and maintain and refine segmentation, or exit and acquisition strategies which can mitigate potential risks.”

Varying markets, varying potential

As industry leaders look beyond their borders, a key take-away is that growth and profitability vary significantly by markets and sectors, depending on each market’s maturity and industry and regulatory structure. While it is common to focus on populous Muslim markets, operators should not lose sight of other markets across Europe, Africa and the Asia-Pacific region.

“Adopting a multi-market approach not only helps manage risk diversification, but also offers profitable opportunities in niche segments. Investing in rapid growth markets, which are often made up of young, growing populations can lead to achieving critical mass very quickly. However, detailed market analysis and planning are required to ensure strategic success,” says Abid Shakeel, senior director of EY’s Global Islamic Banking Centre.

While Saudi Arabia, the UAE and Malaysia hold the lion’s share of the takaful market, the acquisition of market share has not necessarily translated into profitability in many instances. Financial performance and managing key strategic issues remain challenging for takaful operators in many regions.

High development potential for rapid-growth markets

Rapid-growth markets are poised to become the new centres of development in the next ten years. Infrastructure and new regulatory enhancements are presenting opportunities across all markets. For the takaful industry, large populations of countries, such as Indonesia and Turkey, offer untapped potential demand.

Investors looking to establish new takaful operations in rapid-growth markets must be prepared for the long haul and be aware that the nature of returns will not be comparable to those of conventional issuers. Investments must be made on commercial merit, rather than for altruistic reasons. Learning from core Islamic finance markets is key to addressing the rising demand in these countries expeditiously.

Presently, there is a dearth of takaful operators who are capable of providing leadership to the growing internationalisation of the industry. Few can truly make the claim to being regional, let alone global. In order for the industry to be successful, a well-established regional or global player must emerge.

Any strategy to develop and grow into regional players must reflect the inception and growth of the insurance industry. Continual building of scale in commercial lines, determining which markets require physical attendance versus presence in markets where local operators would not have the capacity to underwrite large risks and the use of actuarial analysis to price such risks are strategies operators must consider in their move towards becoming regional champions.

“For takaful operators looking to expand their regional footprint, achieving a unified approach across all markets will remain a challenge as no two markets are alike,” adds Nazim. “Risk and product specialisation, growth strategies and familiarity with the regulatory framework of each market they choose to penetrate are key elements that require close attention. In the medium term, traditional Muslim markets with established takaful practices will continue to provide favourable conditions.”

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