The fast paced growth of Islamic banks and Islamic bond offers may have lifted this sector’s global profile, but questions remain over the future of a less noticed product: the takaful or Islamic insurance market.
Analysts believe the growth of Islamic banking and finance worldwide will spur the growth of the Islamic insurance market, especially as businesses realise they must have Islamic insurance if they are to be eligible for Islamic loans.
Takaful is an Arabic word meaning ‘guaranteeing each other’. On the surface, it is similar to the principles of mainstream mutual insurance. But, unlike practices followed by mainstream insurance companies, takaful businesses have to follow Islamic norms, such as producing Islamic contracts for clients and appointing a board of Islamic shariah scholars to vet business decisions.
Moody’s, the credit ratings agency, estimates total takaful premiums worldwide were worth about $2bn in 2005 and predicts this will rise to $7bn by 2015.
New opportunities
Practitioners among insurance companies in the oil-rich Middle East believe that after years of takaful businesses built largely on products offered for general insurance, there are fast emerging opportunities to offer life and other types of insurance to Muslims seeking Islamic alternatives to mainstream products.
Many prospective clients have not ventured into insurance in the past because they believed that mainstream insurance violates Islamic principles, although trends are beginning to change. “Clients are not as averse as they were some years ago to the idea of getting insurance, provided this is not in conflict with Islamic norms,” says a Western businessman based in the Gulf region. “In the past, insurance of any kind was considered unacceptable, but times have changed and there is new thinking under way.”
Bankers and other analysts say part of the change has been driven by Saudi Arabia’s decision last year to issue at least three new licences for companies offering takaful, after years of pondering over the subject.
Against speculation
Past resistance to regular insurance by more conservative Muslims was largely due to the view that the business of insurance companies is built on speculation of a kind that is unacceptable in Islam: the concept that non-claimants receive no return on their premiums, while claimants receive pay-outs far greater than the sums they have put in.
However, solving the insurance puzzle has been cited by analysts as just one of the many required steps to making Islamic finance more acceptable to mainstream prospective customers in the Western world, notwithstanding the rapid growth of this concept in parts of the Muslim world.
One hurdle for prospective non-Muslim borrowers, especially those from the Western world, is allowing Islamic scholars who serve on the boards of lenders or insurers to have access to their detailed accounts, at a time of wide divisions between Muslims and non-Muslims. Another challenge will be dealing with the documentation that comes with takaful -related coverage.
Insurance professionals, however, agree that, given the prospects for future growth, takaful as a business practice will probably gain momentum in the coming years and, once a tipping point is reached, exponential growth will occur.
For now, the figures for expected growth offered by Moody’s have provided much sustenance to the proponents of takaful business, who argue that with prospective Arab clients searching for coverage other than mainstream insurance, the take-up of takaful is likely to grow.
