Ex­perts and in­dus­try lead­ers con­verse with Qatar To­day on the is­sues fac­ing the Is­lamic in­surance sec­tor and also its prospects in the com­ing years.

Not­with­stand­ing the un­rest that en­gulfed many coun­tries such as Egypt, Libya and Syria in the Mid­dle East in the last four years, the growth of the taka­ful in­dus­try con­tin­ued un­hin­dered in the Gulf Co­op­er­a­tion Coun­cil (GCC) as in­vestors and com­pa­nies ex­panded their op­er­a­tions in the re­gion.

The other rea­son for the in­dus­try's solid per­for­mance is the dou­ble digit growth of the GDP of the GCC mem­ber states on ac­count of sur­plus rev­enues gen­er­ated by the sale of hy­dro­car­bons in the last six years be­sides the in­creased pur­chas­ing power among Mus­lims, who are the main tar­get of the taka­ful op­er­a­tors.

With a strong bank­ing sec­tor as a backup, the GCC gov­ern­ments have in­tro­duced Ban­cataka­ful scheme which proved to be the most ef­fi­cient chan­nel in dis­tribut­ing tai­lor-made Is­lamic in­surance prod­ucts like med­i­cal taka­ful, the most sought after sharia-com­pli­ant prod­uct in the re­gion.

The Malaysian Taka­ful As­so­ci­a­tion has fore­cast that taka­ful con­tri­bu­tions will in­crease to QR10.99 bil­lion ($3.02 bil­lion) in 2014 from QR8.88 bil­lion ($2.44 bil­lion) last year, on the back of a mar­ket pen­e­tra­tion rate of 14%.

GCC leads the growth

De­spite hav­ing less than 2% of ag­gre­gate Is­lamic fi­nan­cial as­sets, the global taka­ful in­dus­try grew by 5% reg­is­ter­ing to­tal as­sets of QR101.19 bil­lion ($27.8 bil­lion) in 2013. Saudi Ara­bia led the growth in terms of ac­tual vol­ume with QR7.64 bil­lion ($2.1 bil­lion) rep­re­sent­ing a 23.9% in­crease but it was In­done­sia's show as its taka­ful as­sets grew by an as­tound­ing 50.5% in 2013.

In its re­port en­ti­tled “Global Taka­ful In­sights 2014,” the pro­fes­sional ser­vices firm Ernst & Young (EY) said that the gross taka­ful con­tri­bu­tion of the GCC was around QR32.4 bil­lion ($8.9 bil­lion) in 2014 com­pared with QR28.76 bil­lion ($7.9 bil­lion) in 2013 and is ex­pected to be around QR72.8 bil­lion ($20 bil­lion) by 2017. Saudi Ara­bia, which is the core mar­ket in the re­gion and com­mands 48% share in the global mar­ket, held the lion's share of 77%.

“With the high po­ten­tial of the in­ter­na­tion­al­i­sa­tion of taka­ful, the ur­gency to grow and push for re­gional cham­pi­ons within high growth and sta­ble re­gions is greater than ever. This will al­low the in­dus­try to leap to the next level to re­alise its global mar­ket po­ten­tial and po­si­tion it as a strong eth­i­cal-based al­ter­na­tive to con­ven­tional in­surance,” says Abid Sha­keel, Se­nior Di­rec­tor of EY's Global Is­lamic Bank­ing Cen­tre.

Ac­cord­ing to him, com­pe­ti­tion, op­er­a­tional is­sues and dearth of qual­i­fied tal­ent con­tinue to im­pact the sec­tor's growth in the re­gion. Prof­itabil­ity of taka­ful firms has been threat­ened not just by un­dif­fer­en­ti­ated strate­gies but also the lack of uni­form reg­u­la­tions al­low­ing them to op­er­ate across dif­fer­ent mod­els.

“Un­dif­fer­en­ti­ated business strate­gies mean most op­er­a­tors are com­pet­ing in­tensely and this is likely to squeeze out the un­der-per­form­ers. With strong com­pe­ti­tion from con­ven­tional in­cum­bents, taka­ful op­er­a­tors are likely to con­tinue their strug­gle in the medium term, although some will look at al­ter­na­tive cus­tomer seg­ments and ex­plore merger op­tions,” he says.

In striv­ing for scale and prof­itabil­ity, op­er­a­tors are look­ing at struc­tural trans­for­ma­tion around risk, pric­ing and cost ef­fi­cien­cies. Driv­ing progress amidst in­ten­si­fy­ing com­pe­ti­tion, the in­dus­try is re-ex­am­in­ing its strate­gies, op­er­a­tions and reg­u­la­tions in or­der to gear it­self up for fur­ther growth and a sus­tain­able ecosys­tem.

For in­stance, Gen­eral Taka­ful, one of the lead­ing Is­lamic in­surance com­pa­nies in Qatar, has fine-tuned it­self to the chang­ing sit­u­a­tion. The firm has pri­ori­tised cus­tomer pen­e­tra­tion, cus­tomer ac­qui­si­tion and prof­itabil­ity, growth in ex­ist­ing cov­er­age and in­tro­duc­tion of per­sonal lines of in­surance such as house­hold­ers' in­surance be­sides ex­pand­ing tra­di­tional dis­tri­bu­tion chan­nels to stay afloat in the business.

Qatar a ma­jor hub

Although small in terms of ab­so­lute mar­ket size, Qatar is con­sid­ered a ma­jor hub for Is­lamic in­surance given the large foot­print of taka­ful com­pa­nies and a pro­gres­sive frame­work that sup­ports strong gov­er­nance and in­no­va­tion.

What has cre­ated boun­ti­ful op­por­tu­ni­ties as well as chal­lenges for the lo­cal takaf- ul op­er­a­tors is that the coun­try has been ex­pe­ri­enc­ing or­ganic growth for a cou­ple of years and this trend is ex­pected to con­tinue and gain mo­men­tum un­til the FIFA World Cup in 2022, largely due to high gov­ern­ment spend­ing on in­fra­struc­ture projects. Qatar also has tremen­dous po­ten­tial to tap Is­lamic fi­nan­cial in­sti­tu­tions like Is­lamic banks whose bal­ance regis­tered a growth of 28% be­tween 2009 and 2013.

The same has a trickle-down ef­fect on Is­lamic in­surance which in­sures as­sets thus cre­ated by the Is­lamic banks. Be­sides, the taka­ful firms are of­fer­ing the unique ben­e­fit of pay­ing cash sur­plus to their cus­tomers by virtue of their co­op­er­a­tive op­er­at­ing model.

Da­maan Is­lamic In­surance Company (Beema) Deputy CEO Nasser bin Rashid Al Mis­nad says that the growth op­por­tu­ni­ties for taka­ful com­pa­nies in Qatar are good as the need for sharia-com­pli­ant in­surance is grow­ing steadily and the in­creas­ing num­bers of taka­ful op­er­a­tors are tes­ta­ment to this.

While Malaysia and Saudi Ara­bia have been the global lead­ers of the taka­ful in­dus­try, Qatar, which holds only 4.7% of Saudi Ara­bia's taka­ful as­sets and has a hand­ful of taka­ful and re-taka­ful op­er­a­tors, has oc­cu­pied top po­si­tion in the mar­ket's de­vel­op­ment in 2013.

Ac­cord­ing to the ICD Thom­son Reuters Is­lamic Fi­nance De­vel­op­ment (IFD) re­port en­ti­tled “Har­mony on the Hori­zon,” Qatar's to­tal Is­lamic as­sets stood at QR29.5 bil­lion ($81 bil­lion) and is ranked sixth among the 15 largest Is­lamic fi­nance coun­tries in the world. The top five po­si­tions are

oc­cu­pied by Malaysia, Saudi Ara­bia, Iran, the UAE and Kuwait, re­spec­tively. Of this, the share of Qatar's taka­ful as­sets is QR1.88 bil­lion ($517 mil­lion) (see chart).

De­spite a low as­set base within the coun­try, the in­dus­try's per­for­mance is var­ied as Qatar's taka­ful op­er­a­tors have am­ple op­por­tu­ni­ties to ex­pand their busi­nesses abroad by hav­ing tie-ups with their coun­ter­parts or open­ing of­fices in the de­vel­op­ing Is­lamic fi­nan­cial mar­kets like Su­dan and In­done­sia. In fact, Su­dan is said to be the largest taka­ful mar­ket ex­clud­ing Malaysia and the GCC re­gion.

“Op­por­tu­ni­ties for the taka­ful sec­tor in Qatar are mas­sive. This is largely due to the fast-paced eco­nomic growth en­vi­ron­ment in Qatar, where there is a keen in­ter­est from pol­icy mak­ers to support a vi­brant and sus­tain­able in­surance sec­tor - cou­pled with a sup­port­ive tax en­vi­ron­ment and the emerg­ing high stan­dards of reg­u­la­tions,” says Adeel Mush­taq, Di­rec­tor (As­sur­ance and Ad­vi­sory) with KPMG.

While Qatar is not large in com­par­i­son with coun­tries like Saudi Ara­bia in the re­gion, the in­dus­try has the po­ten­tial for growth, Mush­taq says.

Strate­gic plan­ning helps

What has given im­pe­tus to Qatar's taka­ful in­dus­try is the gov­ern­ment's decision to bring it un­der the guid­ance of a sin­gle reg­u­la­tory body and also to an­nounce a strate­gic plan for the growth of the in­surance sec­tor.

The com­pa­nies too have been ex­pect­ing the move and braced them­selves to adapt to the changes as they feel that the reg­u­la­tory changes were fun­da­men­tally re-shap­ing the in­surance in­dus­try, cre­at­ing strate­gic and op­er­a­tional chal­lenges for in­sur­ers.

“Th­ese op­er­a­tors have al­ready ac­cepted the grow­ing role of new pol­i­cy­mak­ers in in­surance reg­u­la­tion, the growth of con­sumer pro­tec­tion laws, the lat­est in­surance risk and the In­ter­na­tional Fi­nan­cial Re­port­ing Stan­dards (IFRS) ac­count­ing changes,” Majed Akel, Gen­eral Man­ager of Gen­eral Taka­ful, says.

Ac­cord­ing to him, Qatar's gross taka­ful con­tri­bu­tion to the re­gion, which stood at 8% in 2012 and is be­lieved to hold at least 12-15% of the stake this year, is ex­pected to in­crease in view of the gov­ern­ment's decision to make the na­tional health in­surance scheme com­pul­sory for all by end of 2016.

Price­wa­ter­house­Coop­ers Deals Part­ner in the Mid­dle East Ray­mond Hur­ley says the growth prospects for taka­ful in Qatar are very ex­cit­ing. Taka­ful fol­lows core Is­lamic prin­ci­ples of mu­tual co­op­er­a­tion and risk shar­ing. Its phi­los­o­phy of en­sur­ing the well-be­ing of so­ci­ety res­onates in Is­lamic mar­kets.

“As aware­ness of wealth pro­tec­tion, sav­ings and se­cu­rity ben­e­fits of taka­ful in­creases, fam­i­lies will in­creas­ingly de­mand such prod­ucts as they broaden their use of Is­lamic fi­nan­cial ser­vices prod­ucts. Given the ex­ist­ing low in­surance pen­e­tra­tion lev­els among GCC Mus­lim pop­u­la­tions, it is plau­si­ble that taka­ful growth will out­strip con­ven­tional in­surance growth over the next few years in both Qatar and the GCC,” Hur­ley adds.

Prod­uct in­no­va­tion

While the gov­ern­ment is sup­port­ive of the

Is­lamic fi­nanc­ing sec­tor, the op­er­a­tors have been work­ing out new mod­els and prod­ucts to com­pete with their con­ven­tional peers. The com­pa­nies have been in­no­va­tive and of­fer­ing more sharia-com­pli­ant prod­ucts to at­tract cus­tomers as the in­dus­try is be­com­ing cus­tomer-cen­tric to a large ex­tent.

“In fact, almost all con­ven­tional prod­ucts can be sold as taka­ful prod­ucts with a lit­tle al­ter­ation to suit Is­lamic val­ues. We also be­lieve that prod­uct in­no­va­tion is the key to a sus­tain­able mar­ket growth,” Akel says.

Nasser bin Rashid Al Mis­nad sup­ports the view, and says that, though there are enough sharia-com­pli­ant prod­ucts, the com­pa­nies can­not re­main com­pla­cent. Times are chang­ing rapidly and so are the needs of the cus­tomers. So the com­pa­nies need to come up with in­no­va­tive prod­ucts from time to time to keep pace with the changes and needs.

Recog­nis­ing the im­por­tance of of­fer­ing new prod­ucts to their cus­tomers to stay in the game, Qatar Is­lamic In­surance Company (QIIC) says it has ac­corded pri­or­ity to in­no­va­tion, ex­pand­ing out­reach and im­prov­ing cus­tomer ex­pe­ri­ence.

QIIC As­sis­tant CEO for Tech­ni­cal Op­er­a­tions Mo­hammed M Al Jabari says com­pa­nies have been work­ing to match what­ever is be­ing of­fered by their con­ven­tional coun­ter­parts till now but this needs to be changed.

“We feel that there is still room in the prod­uct de­vel­op­ment area and we are work­ing on new prod­ucts, in ad­di­tion to the ones such as fam­ily pack­age, school fee cover, etc. this year, that will be rolled out soon,” he says.

“There is def­i­nitely a need for fam­ily taka­ful (life and sav­ing) prod­ucts in Qatar as well as other coun­tries in the re­gion,” Mush­taq points out.

His ob­ser­va­tions are true as the in­dus­try is ex­pected to grow at a CAGR of 23% till 2016 to QR4.37 bil­lion ($1.2 bil­lion) and the brisk rate of ex­pan­sion in the fam­ily taka­ful seg­ment is likely to help in im­prov­ing the over­all life in­surance pen­e­tra­tion and den­sity in the GCC.

The in­dus­try has shifted fo­cus to a prod­uct-cen­tric ap­proach which left cus­tomers un­able to dis­tin­guish taka­ful from con­ven­tional in­surance prod­ucts and led to price-sen­si­tive com­pe­ti­tion among taka­ful com­pa­nies.

“This is the right time for taka­ful op­er­a­tors to invest in re­search and tal­ent de­vel­op­ment to bring in much-needed cre­ativ­ity within the am­bit of sharia prin­ci­ples. Fur­ther­more, cus­tomers and taka­ful op­er­a­tors have shared the re­spon­si­bil­ity for en­hanc­ing cus­tomer aware­ness, as in my ex­pe­ri­ence, taka­ful is the least un­der­stood con­cept of Is­lamic fi­nance and bank­ing,” he adds

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