Takaful - Global Development & Opportunities Ahead

Based on 2009 statistics, Saudi Arabia recorded the biggest takaful market in the world with approximately US$3.6 billion worth of business. Malaysia recorded second with US$1.2 billion; United Arab Emirates third with US$640 mil; followed with Sudan and Indonesia of US$340 mil and US$252 mil, respectively.  However, in terms of population Saudi Arabia consists of about 27 mil; Malaysia about 29 mil; UAE about 9 mil; and Indonesia about 240 mil of people.  Based on the above statistics it is obvious that Indonesia has the biggest potential takaful business due to high population and Moslem with low business penetration.  Furthermore, Indonesia has currently only 4 full fledged and 36 takaful operators and windows, respectively, with separate license for family and general business.  Takaful market penetration is still low at slightly above 1% compared to it's neighbor of about 12%.

There are several interesting factors in Malaysia which can be the benchmark for other markets like Indonesia:
1. CAGR in the last 5 years about 25% (double digit)
2. Not adversely affected by the global financial crisis
3. Global insurers had participated in takaful business via JV partners (high growth potential)
4. No. of takaful operators surged to 12 from 8 previously

With low takaful market penetration especially in Indonesia, it indicates a huge growth potential ahead for existing and new operators to grab.  Conventional insurers in the said countries registered double digit market penetration for instance Malaysia with more than 40%.  For countries with high Moslem population, takaful market penetration is expected to surpass the conventional rate in the next 5-10 years given the right strategies in place.  Moreover, Moslem comprise of about 25% of world population thus making takaful a huge potential awaiting ahead.  Statistics also indicated that significant proportion of the population consist of those aged 35 and below with highly sophisticated education and IT savvy.  This will lead to high demand for product like takaful in the near future.

What needs to be done in order to achieve the aspiration to increase market penetration beyond conventional?

Firstly, existing takaful operators shall ensure strong financial capabilities to be able to absorb or underwrite large and specialised risks with bigger retention capabilies. Shall be robust in new product development to fulfill financial needs of modern days consumers.  Takaful operators shall also minimize their dependencies onto conventional reinsurers as well as insurers thus giving full support to retakaful players.  With stronger financial capabilities, the operators can look into expanding across borders and become global takaful operators.

Technically, takaful operators shall build sufficient financial strength in order to meet with minimum risk based capital requirement.  This will include prudent actuarial reserving requirements.

Wealthier countries including Islamic Development Bank (IDB) might want to consider to extend their funds into takaful operators mainly to support the Islamic financial institutions.  With additional funds (less emphasize on returns), takaful industry can equip with latest and efficient information system to ensure the best process flow leading towards beyond expectation deliverable.

Last but not least, the industry shall find ways and means to attract best talents who will build their career within the industry.

Do we really need microtakaful?

We always hear several quarters or parties urging the takaful industry to promote the microtakaful business whether in Malaysia, Indonesia, or any other countries.  Despite of those numerous efforts, the outcome of microtakaful business is not as what expected.The number of operators which participated in this business is less than 3 players even though the main objective of this initiative is really ethical and jive with the concept of takaful i.e. helping each other.  Now we need to do really assess whether this is the right strategy or not.

In Malaysia, the government is working hard to develop the nation into a high income population.  This is in line with the aspiration to become a developed country by 2020.  However, this high income population initiative definitely will result in lower low income population.  This segment of population is actually the main target market for microtakaful business.  Therefore, the appetite of takaful industry to promote microtakaful business is obviously eroding.  This could be the main reason why the response from the industry in microtakaful business is almost negligible.  We need to review the initiatives thoroughly and decide whether we should continue in promoting microtakaful business.

Ehsan ILT Med