Shari’ah-compliant insurance, Takaful, is generally recognised as one of the fastest growing businesses in Islamic finance. Ernst & Young (E&Y) has calculated that the global Takaful market, excluding Iran, has been expanding at a compound annual growth rate of 20.4 per cent since 2004, and will reach $4.3 billion by 2010 if that growth rate is sustained in the coming year.While the challenge of developing Shari’ah-compliant solutions for the insurance sector is fast being overcome, ensuring that the product is delivered efficiently to consumers is perhaps a more formidable challenge, for a number of reasons.
First and most obviously, insurance of any kind, conventional as well as Shari’ah-compliant, has been slower to achieve widespread acceptance in many Muslim-majority countries than in economies in Western Europe and North America. According to E&Y, while insurance premiums amounted to 8 per cent and 9 per cent of GDP in the US and Western Europe respectively in 2006, they only made up 1 per cent of GDP in the Middle East and Central Asia.
In part, that relative underdevelopment is a reflection of the religious mistrust of the concept of insurance. It is a by-product of the fact that a range of financial services closely associated with insurance in western markets, such as home loans, remain relatively underdeveloped in most Muslim-majority countries. The fact that insurance has not been historically compulsory for motorists, home-owners or other consumer groups in many Muslim countries does not help either.
Other than having to also prove the Shari’ah authenticity of Takaful products, pricing also remains a major challenge. In a paper written in 2007, Ajmal Bhatty, then head of Takaful for HSBC Amanah, said that “many customers may believe that since Takaful products are based on Shari’ah, they ought to be cheaper; a misconception that needs to be corrected through training and promotional campaigns.”
A further challenge for Takaful operators is that in an increasingly competitive market, they need to ensure that they can effectively compete for shelf space along with the bank’s other products, as well as with conventional insurance. As Standard & Poor’s (S&P) cautions in a recent report, “the competitive environment will remain challenging, because members of the traditional insurance market have the ability and tools to match the ambitions of the members of the Islamic sector.” As a result, “Takaful companies must demonstrate a credible alternative to the traditional market over and above the initial religious affiliation.”
Given these challenges, what are the most effective ways of distributing Takaful products? Historically, the relatively small and fragmented nature of the industry meant that direct marketing was the favoured mode of distribution. Direct sales remain an important distribution channel today, with new technology based on the internet and mobile telephony emerging as increasingly popular distribution modes.
"TAKAFUL COMPANIES MUST DEMONSTRATE A CREDIBLE ALTERNATIVE TO THE TRADITIONAL MARKET OVER AND ABOVE THE INITIAL RELIGIOUS AFFILIATION."
But as the volume and sophistication of Takaful products expand, new and more efficient channels that are capable of achieving enhanced economies of scale are likely to emerge. Many analysts believe that the most promising and efficient means of distributing Takaful is via bancatakaful, or the distribution of Takaful products via banks’ branch networks.
Although bancatakaful continues to lag behind direct marketing as the favoured distribution channel, especially in the Middle East, it appears to be the fastest growing method in Malaysia. Mohd Tarmidzi Bin Ahmad Nordin, chief executive of Etiqa Takaful, said that the share of bancatakaful in Malaysia rose from just 6.9 per cent in 2004 to 19.3 per cent in 2005, and 29.6 per cent in 2006.
There are three forms of the bancatakaful model. The first involves Islamic banks establishing their own Takaful subsidiaries, and using these subsidiaries as a means of channelling a range of their own products to the customer base. This model appears to be gaining popularity among a number of Shari’ah-compliant banks, including Qatar Islamic Bank, which has recently announced plans to establish a new Takaful subsidiary.
This model has also been favoured by banking giants such as HSBC, which distributes Takaful products to its clients in Malaysia and the UK via its global Islamic banking division, HSBC Amanah, which was set up in 1998.
Some banks have also decided to create new brands to differentiate their insurance franchise from their banking operations. In Malaysia, Mayban Fortis has streamlined its insurance and Takaful business under the Etiqa name, with the conventional and Shari’ah-compliant arms operating under the names of Etiqa Insurance Bhd and Etiqa Takaful Bhd, respectively. Their products are distributed through a network of 14,000 agents, 52 insurance and Takaful branches, as well as Maybank’s branch network, the internet, call centres and ATMs.
The second bancatakaful model is based on the establishment of a joint venture between an Islamic banking unit and a specialist insurance company, with a view to co-designing products that are then distributed via the bank’s network. This is an example of pooling the bank’s distribution franchise and its partner’s expertise in insurance.
An example of this model is the Takaful joint venture that was announced in April between Ahli United Bank (AUB) of Bahrain and the UK’s Legal & General Group. The joint venture company will initially offer a range of life and health insurance products and pension plans to retail and corporate customers throughout the Gulf region, where AUB has an extensive distribution network.
Through subsidiaries and associates in markets such as Kuwait, Qatar and Oman as well as Egypt and Iraq, AUB now has a network of 90 branches in the Middle East, giving it access to a number of regions where Takaful remains underdeveloped.
In the third bancatakaful model, the Takaful operator is responsible for product design while the bank acts solely as the distributor. In this model, the product can either be branded as the Takaful operator’s, or it can be branded as the bank’s own product; in other words, it can be distributed under a white labelling agreement.
This model is expected to become an increasingly popular option as Takaful’s footprint expands in a growing number of countries, including those with sizeable Muslim minority populations who are currently unable to insure themselves through conventional products.
SUBSTANTIAL INVESTMENTS
In all three models, substantial investments need to be pumped in human resources, and in ensuring that all possible avenues are explored in order to promote the benefits of the Takaful product beyond its religious attractiveness. Sales incentives, customer awareness programmes and special promotions are all examples of ways in which Takaful companies have sought to strengthen the appeal of Takaful relative to its conventional alternative.
The bancatakaful model has a number of very clear advantages for Takaful operators. By having access to an extensive and well-diversified branch network, Takaful operators are able to reach a much wider audience than they could hope to access individually. At the same time, access to a bank’s branch network in turn gives Takaful operators access to a powerful client database, which can be used to tailor-make a range of products to match client demand.
The bancatakaful model also carries a number of attractive benefits for banks. In particular, by adding Takaful to the suite of products that they offer to their customers, banks can promote a broader range of Islamic investment options. According to E&Y, by the end of 2007, there were over 500 Shari’ah-compliant mutual funds available to investors worldwide, with 153 new funds created in 2007 alone. With high net worth clients’ wealth expected to grow faster in the Middle East between 2006 and 2010 than in any other region, it is little wonder that E&Y forecasts that “the total Islamic funds universe could easily reach 1000 funds by 2010.”
Distributing products such as Shari’ah-compliant mutual funds or principal-protected investments through the same channels as Takaful products, or combining elements of these products into a Takaful policy, can be a very powerful way of increasing Takaful operators’ share of bank’s retail customers, and minimising the costs involved in marketing and distribution.
That appeared to be a conclusion drawn from a survey undertaken in August by CIMB Aviva Malaysia; 67.9 per cent of respondents indicated that they would be interested to invest in products that combines principal protection, investment diversification, and insurance cover.
CIMB Aviva is catering to this demand with its CIMB Islamic Market Select, a Shari’ah-compliant product which provides 100 per cent principal protection along with the upside potential of investing in 17 different markets. CIMB is using its wide network of 366 branches to market this product throughout Malaysia.
Clearly, for those able to combine product innovation with competitive pricing, demonstrable Shari’ah authenticity and a proven means of broad distribution, the outlook for Takaful remains exciting, although competition will inevitably intensify as more players enter the market.
Sohail Jaffer is the partner of international business development for the FWU Group.
