Saudi Arabia remains by far the largest takaful market, contributing $4.3 billion or 51.8 percent of the industry at an average contribution per operator of $141 million, according to Ernst & Young's World Takaful Report 2012 released Monday. Malaysia grew 24 percent to reach contributions of $1.4 billion at an average contribution per operator of $141 million. The third rank is held by the UAE with contributions of $818 million, growing at 28 percent. Sudan is the most significant market outside of the GCC and SE Asia, with contributions totaling $363 million, growing by 7 percent in 2010. The 5th edition of Ernst & Young's "World Takaful Report 2012: Industry Growth and Preparing for Regulatory Change," unveiled at the 7th Annual World Takaful Conference 2012 in Dubai, confirms that the global takaful contributions grew by 19 percent to $8.3 billion in 2010. Of these, the GCC contributed $5.68 billion and South East Asia contributions were $2 billion. In 2010, growth in the GCC slowed to 16 percent, from a CAGR of 41 percent in 2005-2009, as the implementation of compulsory medical takaful in Abu Dhabi and Saudi Arabia was completed earlier. Ashar Nazim, MENA Head of Islamic Financial Services, Ernst & Young, said: "The takaful industry continued to show double digit growth in 2010, albeit at a relatively slower rate of 19 percent compared to previous years. Among key markets, Malaysia and the UAE again achieved growth rates of over 24 percent, while Saudi Arabia saw its gross contributions increase by $0.5 billion." Saudi Arabia leads Malaysia and the UAE in market size. "With current growth trends, and the addition of new fringe markets such as Indonesia and Bangladesh, we expect gross contributions of $12 billion by 2012," Ashar added. The Islamic finance share in the GCC and Malaysia is 25 percent and 22 percent respectively whereas the takaful market share is 15 percent and 10 percent respectively. In terms of consumer segmentation, the Shariah appeal of takaful makes it predominantly retail driven in most markets. The corporate business is attracted through a value proposition based on the operators' reputation, history, product suite, service standards, relationships and pricing and this segment has significant room for growth. Gordon Bennie, MENA Financial Services Industry Leader, Ernst & Young, said: "The GCC takaful market predominantly comprises of general takaful business with family takaful accounting for as little as 5 percent in certain markets. With high disposable income average and low market penetration, the GCC presents great potential for family takaful. Focus on customer research to understand needs and expectations, in addition to focus on customer education and distribution capacity-building would allow this market to be tapped." "Large Muslim markets such as Libya, Egypt, Bangladesh, Indonesia and Brunei are opening up to takaful," added Gordon. Insurance companies continued to yield higher returns with an average return on equity of 8 percent in the GCC compared to the takaful operators with 4 percent. Operators in Saudi Arabia have struggled to show positive returns since the financial crisis. The local market is currently dominated by three players, with the remaining operators incurring high expense ratios and loss ratios in their efforts to gain market share. Though the combined operating ratios of Malaysian takaful operators are better than their conventional peers, the reverse is true for the GCC. Strong competition, evolving regulations and shortage of takaful expertise are identified as key risks in both the GCC and South East Asia. Young takaful operators are relying upon aggressive pricing strategies to compete against the established, older, conventional players. Such pricing is not sustainable and causing significant pressure on the industry's profitability. There are increasingly stringent regulatory requirements on capital and solvency, indicating the regulators' desired future direction. While most operators agree that the new regulations are a positive development, they are concerned over increased variances in regulatory regimes across jurisdictions. Such variances make it difficult for takaful operators to function across regions and also lead to confusion for customers and multinational insurers. "Industry consolidation would allow takaful operators to compete effectively with larger, more established conventional insurers and also reduce unhealthy price wars. However, the industry is still growing rapidly which is keeping shareholders interested in their takaful operations. The industry will take a bit more time to establish itself before it can be decided which players can sustain themselves and which cannot," Ashar pointed out. Abdulla Mohammed Al Awar, Chief Executive Officer of Dubai International Financial Centre Authority, said “as a global financial hub, it's critical that we promote Islamic finance, and continue our efforts in creating an environment which eases the development and integration of Shariah-compliant products into global financial markets. Currently, 9 percent of our regulated firms endorse Islamic business models. There are tremendous growth opportunities yet to be fully tapped... such conferences raise awareness of the importance of insurance and takaful, and are vital to growing this sector.” Hussein Al Meeza, Managing Director and Chief Executive Officer, Dubai Islamic Insurance and Reinsurance Company (AMAN) said “with the takaful segment expected to continue growing by leaps and bounds, the future of the industry looks very bright and promising. In order to ensure that the industry maintains its growth levels, it is essential to raise the level of awareness on the significant benefits of using takaful products and services. It is also vital that collective efforts should be made to strengthen underwriting capabilities. The industry players should also tap into newer markets.
