Global Takaful industry is well on course to surpass $8.8 billion in contributions in 2010. Contributions grew by 29 percent in 2008 to reach $5.3 billion. Takaful refers to Shariah-compliant cooperative insurance. The third edition of Ernst & Young's World Takaful Report 2010 unveiled at the 5th Annual World Takaful Conference of 2010, confirmed that Saudi Arabia and Malaysia are the biggest markets. Saudi Arabia, with contributions totaling $2.9 billion in 2008, and Malaysia with $900 million are the top two Takaful markets in the world. Sudan is the most significant market outside of the GCC and SE Asia, with contributions totaling $280 million in 2008. Global compound annual growth rate for Takaful for the period 2005 - 2008 has been 39 percent; the Levant region and Africa grew at 18 percent, the Indian Subcontinent at 135 percent, SE Asia at 28 percent and the GCC at 45 percent. The UAE was the fastest growing Takaful market in the world with a compound annual growth rate of 135 percent from 2005-2008 while Indonesia rose quickest in SE Asia at 35 percent. Sameer Abdi, head of Ernst & Young's Middle East Islamic Financial Services Group, said “globally, performance has been mixed. Yields realized by GCC operators have been comparably high but volatile, while Malaysian operators have posted stable returns driven by better underwriting results. In terms of operating efficiency, average combined ratios of GCC firms have continued to improve and reached 72 percent in 2009 (latest year for which data is available), indicating improving operational efficiency. The figures seem to indicate that while the industry may seem to be temporarily bogged down by market troughs, the long term outlook seems very positive.” Compulsory medical insurance requirements in Saudi Arabia have contributed to growth in family and medical Takaful which, together, are estimated to bring in 49 percent of gross contributions in the MENA region. Family Takaful is estimated to provide only 5 percent of these total contributions. SE Asia is the most highly penetrated family and medical Takaful market bringing in 73 percent of net contributions in 2008. Contributions from family Takaful in this market are much higher and accounted for 73 percent of net contributions in Malaysia in 2008. Both family and medical continue to grow strongly, with the MENA region following the growth trends witnessed in SE Asia. Comparatively high rates of real GDP growth, decreasing government safety net, coupled with low insurance penetration and favorable demographics, suggest strong future growth in the MENA region. The report however pointed out that while industry growth remains strong, the challenge for operators is to balance profitability through their early years of development. Unsurprisingly, the primary challenge remains the shortage of skilled professionals across all key functions - underwriting, risk management, claims management and technology deployment. Underwriting losses remains a source of worry for most operators and specialization could be the answer. Enhancing their understanding of the customers, sectors or geographies, and therefore improving their risk analysis and pricing could yield quick results. “Most Takaful operators are yet to achieve critical business volume, despite incurring substantial establishment costs over the years. Most Takaful firms are startups or small players with limited access to quality business. It's important that they rethink their go-to-market approach if they want to achieve critical mass and become sustainable in the long run. A lot of priority should be given to controlling operational costs. For example, outsourcing arrangement for back-office operations can make a sizeable difference in creating leaner and more efficient operations,” Abdi emphasized. Distressed asset values and challenging capital markets are some of the other challenges that the industry faces given the impact of the global financial crises. “The road ahead offers strong business growth, but the real challenge is growth with profitability”, he noted. The report also draws attention to the governance system. The role of Boards will become increasingly decisive in steering companies towards recovery. As a result, many operators have initiated a rigorous review of their strategies and financial plans. Capital generated internally through profitable operating performance will be critical to maintaining financial stability and funding growth. “We are entering a new and changing world, where quality of strategy execution and stronger capital planning are at the top of the management agenda. The industry has certainly shown resilience during the global financial crises. It's about time that the industry lobbies for deeper local Islamic capital markets and diversifies its business mix in favor of areas with sustainable growth potential,” Abdi said. “Locally in GCC, we expect some consolidations across several markets over the next three years, leading to the creation of financially stronger market leaders,” he added.