Islamic Insurance - Malaysia Top

The Islamic insurance penetration in Qatar far exceeded that in the Middle East, where lack of differentiation and associated pricing pressure, along with poor distribution networks, emerge key challenges for the takaful companies, though the region made the early moves to establish Islamic insurance than Malaysia, according to A M Best, a global insurance rating agency.

The overall penetration figures for the Middle East mask underlying differences between various countries in the region with Bahrain and Qatar both enjoying good takaful penetration rates of 22% and 13%, respectively compared to the Middle Eastern average of 8% in 2014, A M Best said in a report ‘Takaful Life and Nonlife Issue Review’.

However, both these markets (Qatar and Bahrain) are relatively small compared to the UAE, which whilst having the largest takaful market in the region, has the lowest penetration rate (6%), which brought down the overall average for the Middle East, it said.

Qatar was the first country in the Middle East to have a takaful company, with Al-Khaleej Takaful Insurance and Reinsurance Company (now renamed Al-Khaleej Takaful Group) establishing itself in 1978, followed by Islamic Arab Insurance Company (Salama) in the UAE in 1979. Both of these companies pre-date the establishment of the first takaful company in Malaysia (Syarikat Takaful Malaysia in 1984).

“Despite the Middle East’s early mover advantage, Malaysia’s takaful industry has made stronger inroads into its local insurance market,” A M Best said, highlighting that the level of takaful penetration (ratio of takaful contributions to overall insurance revenue) reached nearly 15% in Malaysia compared to modest 8% in the Middle East in 2014.

Even though there are only 11 takaful companies in Malaysia against 42 in the Middle East, the report found that the South East Asian country generates more gross contributions than the entire Middle East (excluding Saudi Arabia) combined.

Finding that the relatively strong Islamic banking penetration ratios in both Malaysia and the Middle East demonstrate a healthy demand for Shariah-compliant financial solutions; it said despite having a stronger Islamic banking penetration ratio, takaful companies in the Middle East have thus far failed to convince Shariah-conscious Muslims in the region to buy Islamic insurance products.

Malaysia has generated its strong takaful penetration rates with only 60% of its residents being Muslims compared to an average 92% for the Middle East and North Africa region, the report said.

“A common issue in the Middle East is a severe lack of differentiation between takaful and conventional insurers, with most companies competing on the same product classes and utilising similar distribution channels,” it said, adding “for the (Middle East Islamic insurance) industry to tackle these challenges, the operators will need to adopt suitable strategies and appropriate structures to ensure that the takaful model employed is balanced, and that it serves the needs of the enormous potential for Shariah-compliant insurance, to the benefit of all stakeholders.”

Takaful operators in the Middle East are likely to face further competitive pressure from conventional insurers setting up Takaful subsidiaries or windows to generate additional sources of revenue, it said, adding a further detriment for Middle East takaful companies is the distribution networks they utilise as they rely on broker and agency distribution channels compared to bancatakaful, a key distribution channel in Malaysia that allows takaful companies to tap into the existing customer bases of Islamic banks. “Given that Islamic banking penetration is higher in the Middle East, takaful operators in the region are depriving themselves of this important distribution channel,” it said.

In the Middle East, a majority of insurance activity is concentrated in the non-life sector (general takaful in Islamic insurance) with motor and medical insurance accounting for 72% of total GWC (gross written contribution); while in Malaysia, life assurance (family takaful) makes up 64% of total GWC.