Insurance is still a new concept to many Middle Eastern consumers. The region’s spend on insurance at just 2.6 per cent of gross domestic product (GDP) is well below the worldwide average of 7.5 per cent.

GCC insurance premiums are estimated at about $11-12bn, just about a quarter of that of a medium-sized European country, such as Belgium.

For the growing array of takaful companies (Islamic insurers), this represents both a source of potential growth and a hindrance to current performance.

Optimists would say that the market, particularly in the more affluent GCC states, is primed for a wave of expansion as consumers realise the benefits of Islamically branded insurance products and services.

Pessimists, meanwhile, would say appetite for insurance is still tepid and providers are struggling to create successful franchises, amid fierce competition in a finite marketplace. 

Long-term growth for Islamic insurance

In the long-term, the optimistic view should ultimately prevail. Global takaful contributions – the Islamic term for insurance premiums – will nearly double from $5.3bn in 2008 to surpass $8.9bn this year, according to UK auditor Ernst & Young’s 2010 World Takaful Report. Strong growth in health takaful in the GCC is one of the key trends outlined in the report.

The GCC has shown some of the fastest growth rates in Islamic insurance

Long-term demographic and regulatory drivers point in only one direction. With state safety nets likely to erode over time and a growing middle-class population demanding more sophisticated financial products to safeguard their families’ future, takaful providers stand to win over significantly more customers under the rubric of sharia-compliance.

This socio-economic trend is accompanied by a governmental push to encourage the take-up of insurance. Saudi Arabia has introduced compulsory health insurance for up to 1.5 million nationals and their families working for private companies, as well as for expatriate workers.

Abu Dhabi has also introduced mandatory health insurance for expatriates, which is being extended to nationals. Other states are looking to follow their example, with Bahrain tipped to be the next in line. 

Takaful contributions account for less than 0.5 per cent of the total insurance premiums spent annually by Muslims, but this is likely to increase over time.

For example, in Saudi Arabia, insurance spend as a total of GDP increased to 1.06 per cent in 2009, up from 0.62 per cent in 2008, according to figures from the Saudi Arabian Monetary Agency.

The GCC has shown some of the fastest growth rates in Islamic insurance. The combined annual growth of Gulf takaful contributions between 2005 and 2008 was 45 per cent – outpacing southeast Asia’s 28 per cent – and rising from $1.24bn to $3.7bn.

Saudi Arabia, with contributions totalling $2.9bn in 2008, is one the leading takaful markets, though in absolute volumes, Iran – where the entire insurance sector is structured Islamically – has contributions in excess of $4bn, according to Ernst & Young. Takaful models vary between countries, though there are common principles. These include maintaining a clear segregation between assets owned by members and those owned by the insurer, while ensuring that investments made using the pool of funds avoid ‘haram’ or forbidden sectors, such as alcohol and gambling. 

Under legislation introduced in 2003, Saudi Arabia requires that all insurance companies operate under a cooperative business model – however not all cooperatives in Saudi Arabia operate as takaful companies. The cooperative system requires a 90:10 split of profits between shareholders and policyholders respectively and a corresponding segregation of funds. Any deficit in the policyholders’ fund is borne solely by the shareholders.

The long-term outlook suggests that there is going to be a very substantial market for takaful players”

Peter Hodgins, Clyde & Co

Bahrain, on the other hand, operates a combined system with takaful operators required to disclose corresponding fees to policyholders. In case of a deficit in the policyholders’ fund, the operator is required to provide a ‘Qard al-Hasan’ – paying claims with the underwriting fund and an interest-free loan.

Islamic insurers: A resilient sector

Takaful players have shown some resilience during the financial crisis. “Through the crisis years, insurance markets continued to grow in Bahrain, Qatar and Kuwait and in Saudi too,” says Nick Frei, CEO of T’azur, a Bahrain-based takaful company. “The only market where shrinkage is possible is the UAE.”

Returns under takaful are divided between the policyholders, obtained from the takaful pool surpluses, and the shareholders. While policyholders have seen returns come under pressure, the shareholders have started to see an increase in returns, though not on a par with conventional insurers.

Like their conventional counterparts, takaful operators are coping with depressed capital levels, distressed asset values and difficult capital markets. There are also other structural impediments to growth. Most takaful operators are startups or small players, limiting their access to quality customers. There are exceptions, however. Bahrain-based Solidarity General Takaful Company saw top-line growth in 2009, reporting a 48 per cent increase in gross contributions to $20.7m over the previous year. Some classes of business, such as those related to the construction industry, were impacted by the financial conditions, but growth in other lines more than compensated for the decline.

Although contribution rates have been soft, there have been renewed calls for takaful providers to focus on writing for growth and for a gross underwriting profit, says Peter Hodgins, a UAE-based insurance specialist at law firm Clyde & Co.

Competitive Islamic insurance market

“Obviously, there are good opportunities here with low penetration. The long-term outlook suggests that there is going to be a very substantial market for takaful players, but the key is going to be how you operate in the market now and achieve that penetration. In the short-term, it’s fiercely competitive,” says Hodgins.

Takaful companies are highly exposed to asset risk, with equities and real estate accounting for about 61 per cent of investments, says Alpen Capital in a study of the GCC takaful market issued last year. This means that earnings in the sector are largely driven by the performance of local equity and real-estate markets, which been far from stellar over the past couple of years.

The marketplace has also become increasingly competitive. More than 30 new takaful operators have been established in the GCC over the past three years, with a total paid-up capital in excess of $2bn. Many conventional insurers in Saudi Arabia have transformed themselves into takaful companies, creating an crowded marketplace.

“There are 179 insurance companies in the GCC – and that’s a lot of competition in a finite market,” says Hodgins.

Gulf takaful firms must also confront a wider threat emanating from the newly-established Islamic windows of established conventional insurance companies. These have gained an early market lead in the retakaful sector with reinsurance giants such as Germany’s Hannover Re, Swiss Re and Munich Re establishing reinsurance relationships with a number of regional takaful providers.

Lacking indigenous reinsurance capacity, the Islamic windows of conventional reinsurers have quickly moved in to fill the gap, bringing in their expertise and packaging it in an Islamic manner. Takaful operators are ceding between 30-50 per cent of gross premiums to retakaful companies, says Ernst & Young, which is reducing their ability to generate potentially positive underwriting results.

Given the regulatory push from the Saudi authorities, medical takaful is the largest business line in the region. It is also the fastest growing. According to T’azur’s Frei, medical insurance in Bahrain grew by 27 per cent in 2009, whereas property insurance was flat, motor insurance grew by 4.5 per cent and individual life insurance grew by about 10 per cent.

Life insurance is still undeveloped in the region. “Conceptually, it’s not something that has yet hit home, but you’re seeing more players looking for ways to distribute in the region,” says Hodgins.

One way of boosting the distribution capability would to make better use of banking channels and relationships. Banktakaful – Islamic bancassurance – may register strong growth with many takaful products sold through banks who bundle them together with other financial products. 

The UAE has a well-established bancassurance model, under which banks act as supermarkets with multiple relationships with insurance companies. In Bahrain, foreign banks such as the UK’s HSBC and Standard Chartered are selling insurance products through exclusive relations with one preferred provider. Some local banks have struck joint-venture deals with global insurers to sell takaful products. Bahrain’s United Ahli Bank teamed up with the UK’s Legal & General in 2008 to offer a range of takaful life and health insurance products and pension plans to retail and corporate customers in the Gulf region.

Persuading consumers to start spending more of their hard-earned money on insurance products will still prove a major challenge for takaful companies.

Critical mass

They face other structural obstacles, such as the dearth of sharia-compliant assets. Choice and availability is more limited than their conventional counterparts and mainly comprises listed equities, short-term placements with Islamic financial institutions and real estate. GCC conventional insurers have more options, including bonds, placements with conventional banks, money market and index funds, as well as private equity.

The takaful industry needs to reach critical mass to benefit from the economies of scale that are currently the privilege of only a handful of players. The largest GCC takaful players are doing precisely that, says Alpen Capital. Yet the wider sector remains dominated by small operators and startups with limited access to quality customers. Consolidation could be a key theme in future. 

The biggest challenge is to press the case for insurance as a concept that is valid in the Middle East, not just its Islamically structured variant. It is no coincidence the most-established market segments are those such as motor insurance and health, which are compulsory. 

“With the other classes of business you realise just how much catch up potential there is in the GCC. The fact that motor is the most prominent segment, much bigger than in Europe, is simply down to fact that other classes of business are still developing,” says Hodgins.

The market participants there are. The more advertising is done, the more clients will be exposed to insurance.

“Once Gulf citizens have mortgages or want to send kids for education abroad then obviously aspirations change and with that, the need for insurance,” says Frei. “The potential is still very much here.”