The prospects for the Takaful market
A version of this article by Group Chief Executive and Managing Director, Manoj Kumar was first published in the August edition of Premium Insurance Magazine.
The Takaful market has all the attributes to be successful, yet there is always the perennial question as to why the industry remains relatively fragmented and, although growing steadily, is still significantly smaller compared to other financial products.
There is a very exciting future for Takaful particularly if the market can embrace what’s special and unique about it as a risk sharing product. We need our regulators working to simplify the regulatory framework and we also need a market able and willing to embrace new technology such as artificial intelligence and blockchain as well as developing new industry and cross service collaborations.
There is no doubt that the market has faced challenging times recently. While the pandemic stimulated some market growth, it caused substantial financial losses, affecting collections. In addition, the pandemic’s impact on reducing spending capacity had a knock-on effect with participants not being able to contribute significant amounts of money to Takaful insurance.
But the challenges run much longer term. We are dealing with a fragmented regulatory landscape not only across the Gulf and Middle East but across Islamic jurisdictions, together with a patchwork of differing government support. The regulators have been working hard over the last decade to create takaful specific frameworks. But if we can simplify our regulatory processes further, learn from the best examples in other jurisdictions and focus on product innovation, our regulators could facilitate a more dynamic market which aids the competitiveness of the industry.
Another continuing block to large scale market growth is that there remains a shortage of Retakaful capacity. This not only leaves Takaful insurers with the dilemma of having to reinsure on a conventional basis, but at the same time creates a vicious cycle. The slow growth of the underlying market has caused Retakaful capacity to disappear from the market in recent years, simply compounding the problem. Strengthening Retakaful operators would therefore create a virtuous cycle of more capacity which would in turn assist the growth and expansion of Takaful insurance.
These are not insurmountable challenges and there are certainly reasons to be hopeful with signs that the market is adapting and importantly responding to changing customer patterns.
Without doubt government-sponsored programmes have helped the market to gain a foothold which in turn has built up underwriting capacity, not just in the UAE and Saudi Arabia but now in other major Islamic economies. Countries such as Malaysia, have embraced a more ‘values-based’ approach to Takaful, driven by government and regulatory commitments towards the ESG and sustainability agendas.
It’s not simply about making more Takaful coverage mandatory, but also developing a specific regulatory approach which recognises the particular strengths of Takaful, what it can achieve and how it can stimulate new markets. We need to focus on speed of authorisation, recognise innovation and new technologies and facilitate customers’ demands for greater personalisation of the product.
The UAE has of course always been a market leader and continues to show the way on many of these issues, hosting events such as Expo 2020 is a clear example of that leadership. There has a been a range of regulatory developments over the last decade and there must continue to be a focus on regulatory change keeping in step with market developments. Greater regulatory harmonisation across the Gulf Cooperation Council would certainly be welcome and should remain the ambition. In the meantime, it’s certainly positive that regulators are seeking to support new companies to enter the market and do so quickly, this will not only deliver more choice but new entrants and brands will also reinvigorate the products that consumers can access.
The Takaful market has got to harness the latest technologies. Advances in tech such as AI, blockchain, forecasting and modelling products, and real time performance analysis, will significantly boost the market in the coming years.
Alongside this we also need to look at collaboration and new forms of partnerships. There have been some really interesting ideas put forward about exploring how Takaful providers can develop new business models, working with Islamic banks as well as with Fintech and Insurtech partners. These kinds of partners can develop a whole range of solutions and product offerings which can help traditional Takaful insurers improve service delivery contributing to improved operational, sales, and marketing approaches.
Digitalisation of markets is leading to an increasing demand for more customised and personalised coverage. Harnessing the rich seam of customer data that is now available, we can start to identify new segments or products, and tailor and price these products on an individual customer or situation basis. This has the potential to transform how we assess and price risk as well as how we anticipate and prepare for the timing and scope of claims. Much of this innovation is being led by independent brokers and agents and the knock-on impact for market competition and product optimisation of services is very exciting.
We also need to leverage more capacity with a more serious and sustained focus on Retakaful. Retakaful is a necessity in order to protect and sustain the Participants Risk Fund from adverse financial stress, provide leverage and spread risks. The development of ‘retakaful windows’ can be helpful. They certainly seem to have helped countries such as Morocco and Turkey bring in new sources of business. They can boost demand by showcasing Takaful’s features and characteristics and allow the host to offer competitive prices where there is low-scale demand thanks to shared resources and spreading of management expenses. But the reality is that for established markets in the Middle East, it can only be a temporary solution. Lloyd’s is of course now an established player in Dubai and continues to grow its capacity in the sector, offering further options and it has been remarked that this seems to be helping to develop price parity of Retakaful with conventional lines. The real solution however lies in dedicated subsidiaries. Supporting Retakaful in these ways will help create more scale and ultimately better pricing.
This approach will also help market expansion into areas that should naturally want Takaful options, particularly in North and East Africa, where we expect to see further demand for Takaful in the coming years. There have been positive developments with the Inter-African Conference on Insurance Markets, a body represented by 14 jurisdictions located in sub-Saharan Africa, has amended the insurance code regulation to address takaful activities. In June last year the Uganda Insurance Regulatory Authority proposed to expand its markets by recognising Takaful.
Fundamentally though the Takaful market will only succeed if we can accentuate its unique characteristics. People have pointed to the success of the mutual insurance market in differentiating itself and this may be a model to follow here. Similarly products which are focused on issues such as extending financial inclusion, sustainability, environmental investment, could lend themselves well to having a Takaful element and should be explored further. Takaful providers need to leverage these qualities of the product and its underlying philosophy, once we can, collectively as an industry, clearly articulate the value proposition of Takaful, the market will realise its fullest potential.