Global Islamic insurance industry insights 2013

Finding growth markets

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In recent years, the Islamic insurance industry (takaful) experienced continued strong double-digit growth. Our Global Takaful Insights report captures key Islamic insurance industry and regulatory developments across established and emerging markets. We also  discuss the major needs the industry has as it moves toward the next phase of its growth.

The two biggest markets - Saudi Arabia and Malaysia - have considerably higher populations and gross written contributions (GWC) per operator, with profitability increasing through a combination of scale, risk diversification and improvements in claims and expense ratios.

For Malaysia, a relatively developed Islamic finance industry including the development of the Sukuk market, has supported the growth of its takaful sector. Improved customer understanding and pricing could significantly enhance shareholder value for these operators in the future.

But this is where much of the good news concludes. Most other markets and smaller operators appear to be struggling.

Opportunities and challenges

Our discussions with industry executives suggest that too many operators are pursuing an insufficient number of risks to increase their GWC. Not all will gain market share at the right price to be profitable - and those that do will struggle to satisfy what have been very patient shareholders.

Senior executives need to be clear with shareholders that significant changes in operating models and technology enablement is the only way to address the inflated, legacy start-up costs they are burdened with.

Shareholders for their part need to have a clear strategy and capital plan with options ranging from organic and inorganic growth, maintaining and refining segmentation or exit or acquisition strategy.

And perhaps most importantly, authorities need to simplify regulatory framework across borders, as well as support development of larger, regional players. Regulators need to be watchful on how shareholder capital is being eroded. Some need to take a proactive approach to encourage consolidation where within a short time frame, minimum capital requirements will be breached due to ongoing underwriting losses.

Unless these issues are addressed as a matter of urgent priority, we believe the takaful industry will find it challenging to maintain its growth trajectory.

Global takaful contributions

Global gross takaful contributions are estimated to reach US$11b in 2012 (from US$9.4b in 2011). Saudi cooperatives account for approximately 51% of the global contributions.

Year-on-year growth has slowed from the 2007–11 CAGR of 22% to a more sustainable growth rate of 16%. Although growth potential is high, the various strategic and political issues are dampening the opportunities at large.

Global takaful forecast

The growth of the takaful industry will ride on the recovery of the global economy - prospects appear modest.

EY Global Takaful contributions forecast chart

EY Global Takaful contributions forecast chart

1  World excluding Iran

2  GCC countries included are Bahrain, Kuwait, Qatar and UAE, excluding Saudi Arabia

  • Data for Bahrain, Indonesia, Malaysia, Qatar and Saudi Arabia has been cross-checked with other secondary sources. Data for Malaysia is net takaful contributions.

Sources: World Islamic Insurance Directory 2013, Middle East Insurance Review; EY analysis

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Key findings

Regional structural differences remain. Key markets continue to offer growth prospects with low market penetration rates, but wider opportunities beckon in emerging markets.

The Islamic insurance industry, or takaful in most markets, is still in its infancy. Its potential to replace conventional insurance in leading Islamic finance markets is untapped.

Despite significant regional differences, key markets that are largely underinsured continue to offer growth prospects; these include near developed and emerging rapid growth markets. Meanwhile, regulatory enhancements in rapid growth markets are presenting new opportunities in tapping latent underlying demand and propelling the takaful industry forward so the industry can realize its optimum growth potential.

  • Varying markets, varying potentials
    Growth and profitability prospects for takaful operators vary significantly by markets and sectors, depending on the market's economic maturity, industry and regulatory structure.
  • Growth ≠ profitability
    Despite financial market volatility, there appears to be growth momentum in takaful’s three key markets - Saudi Arabia, UAE and Malaysia. Acquisition of market share, however, has not necessarily translated to profitability in many instances.
  • Growth potential in rapid growth markets
    Regulatory enhancements are presenting new opportunities in rapid growth markets such as Turkey and Indonesia. The challenge is to build on the lessons learned from core Islamic finance markets to expeditiously address rising demand.
  • Malaysia, world’s number one on family takaful
    Malaysia has emerged as the world’s largest family takaful market. With a proven model and regulatory clarity, the country is set to further build on this leadership position.
  • Large regional champions can lead industry
    There is a dearth of takaful operators who are capable of providing leadership to the growing internationalization of the industry. There is a need for large, regional champions to lead growth in regional markets and to participate in international markets.