Takaful companies are structured rather like co-operative or mutual insurance companies in the West. However, instead of the policyholders being synonymous with shareholders, in a takaful company policyholders and shareholders are distinct, both owning capital and sharing in profits. As in conventional insurance, customers pay a premium and are entitled to claim a payout in the event of the relevant misfortune coming to pass. But those lucky enough to avoid broken paving stones benefit doubly, winning a slice of the annual profits denied to those who have made a claim.

In common with the broader Islamic finance industry, funds in hand are invested in a sharia-compliant manner. Interest-bearing instruments are avoided. Investments associated with pork, gambling, alcohol, armaments and other vices are banned. With these provisos, retakaful works in the main like conventional reinsurance.

The Islamic insurance industry is young, but precocious. Most mainstream products now have their sharia-compliant alternative, from fire, to property, medical and - most controversially - life insurance. Assets under management by the worldwide takaful industry in 2002 were estimated at about $2,000 million, of which some $1,200 million worth of business came from the Arab world and Iran. Most forecasts see the global industry growing to about $7,000 million by 2010.

'While the conventional insurance market is growing at about 5 per cent a year, takaful is ballooning by 10-20 per cent,' says Ajmal Bhatty, head of takaful at HSBC Amanah Finance. 'The fastest growth over recent years has been in Malaysia, with around 30 per cent growth a year, but the Gulf market too has been expanding by 10 per cent a year.'

The blossoming of Islamic banking has as much to do with the competitive nature of the products on offer as their sharia-compliant structure. However, the increasing popularity of Islamic insurance products is more closely linked to religious strictures. 'On the one hand, takaful companies are persuading uninsured customers who have always regarded insurance as haram that it doesn't have to be - as long as the funds are ethically invested, it's a legitimate means of protecting yourself,' says Khalid Rehman, director of insurance and reinsurance at Bahrain-based Gulf Banking Consultants. 'On the other, Muslims who are already, reluctantly, insured under the conventional system are attracted by an Islamically acceptable alternative.'

The speed of the industry's rise is tempting a stream of new entrants and bringing established regional and global institutions sniffing around - HSBC being a case in point. Gulf Finance House established a takaful subsidiary, called Solidarity, in 2003. In the same year, the GCC's first dedicated retakaful firm - Methaq Reinsurance Company - was set up by Riyadh-based Saudi Insurance Company. Dubai Islamic Insurance & Reinsurance Company opened its doors in late 2002. And the regional colossus, Arab Insurance Group (Arig), is looking at expanding its Islamic activities. 'We are looking seriously at how we can capture a greater slice of the takaful market,' says Arig chief executive Udo Krueger.

Certainly the presence of well-established and respected institutions bodes well for the development of a still immature market, characterised by small and weakly capitalised players. 'There are a few big hitters - NCCI [National Company for Co-operative Insurance] in Saudi Arabia, Islamic Arab Insurance Company [part of the Dallah al-Baraka Group], Arig - while Qatar Islamic Insurance Company and Takaful International [in Bahrain] have built strong positions in their home markets,' says Bhatty. 'But we need to see a greater number of strongly capitalised companies.' Rehman agrees: 'The market is still too small to talk of a need for consolidation but we do need to see bigger, stronger firms emerging, preferably rated.'

Regulation similarly needs to catch up with demand for takaful products. Supervisory regimes vary widely and the sharia boards of different countries are at odds over the acceptability of various instruments. Manama is attempting to position itself in the vanguard. 'We are working to build on our Islamic banking strengths to make ourselves a hub for Islamic insurers, and so we are trying to help takaful companies develop new products and improve regulation,' says Shehab Tawfiq, head of insurance at the Bahrain Monetary Agency (BMA - central bank).

Proximity to Saudi Arabia will do the BMA's chances no harm. As with conventional insurers, takaful companies are drooling at the prospect of Riyadh's long-awaited insurance law, which will open up the vast and underinsured Saudi market to their advances. 'Saudi Arabia is where the real potential lies,' says Bhatty. 'The per capita life premium in the kingdom is about $2, compared with $74 in the UAE and $65 in Bahrain.'

Mirroring the problems faced by the Islamic banking industry, takaful firms face asset management problems caused by a lack of profitable instruments in which to invest their surplus funds. 'Islamic insurers are not amassing sufficient profit from their policyholders' funds at present because of asset management problems, brought on by a lack of consensus in the nascent industry to drive the creation of suitable new investment vehicles,' says Rehman.

Accelerated development of the region's retakaful capacity is also necessary if it is not to become a brake on further growth in the primary market. Not a single rated reinsurer is in existence, although that is set to change as Arig is in the process of seeking a rating. 'There is huge potential in Islamic reinsurance because sharia boards often decree that takaful funds should ideally be placed with an Islamic reinsurer, but grant a dispensation if insufficient capacity is available. But once we supply the capacity, we will divert these funds,' says Arig's Krueger.

Analysts also believe a heavyweight global financial firm could be persuaded to enter the retakaful market. 'We need more reinsurers to complete the insurance chain,' says Rehman. 'Although of course, you don't want to see the market flooded, enabling takaful providers to sell cheap policies and assume little risk.'

Islamic insurance is following the trajectory of the broader Islamic finance industry in its rapidly rising recognition and popularity. And as in sharia-compliant banking, international players are beginning to take note. In an uncertain world, takaful's growth prospects seem safe. n

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