After nearly 40 years in development, the market for takaful, a form of insurance that complies with Islamic laws, may finally be coming into its own.
The idea of takaful dates back to the seventh century, but the first modern takaful company was set up in Quatar in 1978, and it was only in 1985 that the Grand Council of Islamic Scholars of the Organisation of the Islamic Conference recognized it as the Islamic-approved alternative to insurance.
Even then, the industry faced a number of hurdles. There were few companies capable of developing such products, a very limited pool of investible assets to underpin the necessary capital for insurance and only a small pool of professionals with the necessary knowledge to develop such funds.
There were also no established practices for such products, no appropriate accounting or capital adequacy standards, no training facilities, no distribution channels and no culture of insurance within Islamic societies.
Nascent industry
In consequences, while there is a huge potential market for such products, with an estimated 1.6 billion Muslims globally projected to 2.2 billion by 2030, the industry is still at an early stage of development.
In a recent report, ratings agency AM Best estimates that gross written contributions for the industry globally will reach USD 20 billion by 2017. By comparison, normal life and non-life insurance premiums rose to a combined USD 4,479 billion globally in 2014, according to data from Swiss Re.
That may be beginning to change, however. A great deal of work has been done in recent years to address some of the barriers to industry growth and there is evidence of increasing demand in some markets.
For example, since it was established in 1991, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), an international non-profit based in Bahrain, has developed 94 accounting, auditing, ethic and Shariah standards for Islamic financial institutions around the world alongside a number of specialized professional qualification programs.
At the same time, changing demographics and growing wealth in developing Islamic economies is driving demand for insurance and other financial products.
One country that has lead the way is Malaysia, where the central bank, Bank Negara, has made the development of a robust takaful industry a priority over the past two decades. This commitment was reflected in the establishment of the Shariah Advisory Council of Bank Negara Malaysia (SAC) as the country’s main authority on Islamic finances in May 1997. This has made it easier to identify Shariah-compliant investments that meet local insurance needs and to approve products and services for the Malaysian market.
Since then, the Malaysian government has introduced incentives to encourage savings and pensions in response to population aging, alongside a number of measures to develop the local financial industry.
More recently, on November 23, 2015, Bank Negara published the Life Insurance and Family Takaful Framework, which “aims to promote innovation and a more competitive market supported by higher levels of professionalism and transparency in the provision of insurance and takaful products and services”.
The framework rests on three key pillars. Pillar one is the gradual removal of restrictions on operating costs, which is designed to encourage investment in product innovation. Pillar two is the diversification of distribution channels to make insurance products more accessible to a wider audience and potentially lower costs. And pillar three aims to strengthen the market and improve consumer protection by raising standards within the industry and also educating and informing customers.
