Re-Takaful is an Islamic way of reinsurance where an insurance company can protect itself with other insurance companies against the risk of losses. Though this simplified definition may work within a regulatory framework, there are conceptual differences between reinsurance and re-Takaful from the Shariah point of view. In short, while reinsurance transfers the risk from the insurer to the reinsurer (depending on the structure), re-Takaful adheres to the risk-sharing principle, similar to the Takaful practice. BILAL ABDULAZIZ LAVING examines the Takaful and re-Takaful industry.
The re-Takaful mechanism is one of the areas of transactions (Muamalah) where legality is reinforced through the method of Fiqh that addresses the transactions as described by Al-Suyuti (1998) and Nyazee (2004, p. 34). The original rule for all things is permissibility, unless specifically prohibited by Shariah. Similarly, the re-Takaful sector is one of the areas of transactions that is permissible.
The importance of re-Takaful in the Takaful business centers on the following points:
- Protecting the solvency of the Takaful operator and its participants
- Providing underwriting flexibility and the capacity to accept risk
- Stabilizing claims costs and therefore giving greater stability to Takaful contribution pricing, and
- Allowing Takaful operators to effectively utilize the assets of the re-Takaful provider to give coverage to its clients.
There are two main types of re-Takaful as follows:
- Treaty re-Takaful – Re-Takaful is placed under a standing agreement and all risks within the agreement are automatically accepted by the re-Takaful companies, and
- Facultative re-Takaful – This is a case-by-case basis re-Takaful where re-Takaful is transacted on an individual risk basis. The Takaful company has the option to offer an individual risk to the re-Takaful company and the re-Takaful company retains the right to accept or reject the risk.
Takaful plays a key role in the Islamic finance industry with incessant constructive growth momentum in key markets such as the GCC, ASEAN and Africa now coming in. According to the MIFC (Malaysia International Islamic Financial Center), the Takaful industry was estimated to reach around US$26 billion by the end of 2015 and estimated to exceed US$42 billion by 2020. However, compared with the other Islamic finance sectors, Takaful comprises a market share of only 1.1%.
According to Global Takaful Insights as shown in Chart 1, in 2014, Saudi Arabia leads the Takaful market, commanding over 77% of the total contributions in the GCC. The UAE’s gross Takaful contribution accounts for 15% of the total gross Takaful contributions in the region whereas Qatar contributed to 4% of the market share. The gross contribution of Qatar is projected to double between 2014 and 2017. The huge prospects and strong growth in the economy of Qatar are mainly due to it organizing the 2022 World Cup. The remaining 4% of the total GCC gross Takaful amount is contributed by both Kuwait and Bahrain equally.
The breakdown of Takaful companies in the GCC is as follows:
- Bahrain – six
- Kuwait – 13
- Oman – two
- Qatar – six
- Saudi Arabia – 37, and
- UAE – nine.
Malaysia and Indonesia are the main Islamic finance countries in the ASEAN region contributing to more than 90% of the ASEAN Takaful market share according to Global Takaful Insights as shown in Chart 2. Malaysia, which dominates 71% of the Takaful market, now requires all Islamic windows to be converted to fully-fledged entities. This will streamline the Takaful industry by prompting mergers in the Takaful market so as to meet the new capital requirements.
The breakdown of Takaful companies in the ASEAN region is as follows:
- Bangladesh – six
- Sri Lanka and Maldives – one each
- Thailand – four
- Brunei – three
- Indonesia – five (fully-fledged)
- Malaysia – 13, and
- Pakistan – five.
Africa is another promising region for Islamic finance where it contributes about 3% of the global Takaful contributions with Sudan having about 15 Takaful operators, leading the market in Africa. Kenya’s Insurance Regulatory Authority has projected an insurance penetration of 3.5% by 2018 from 3.1% through the issuance of the policy and framework for the development of the Takaful industry in Kenya.
Nigeria has also played its role in the industry by setting up a Takaful framework and registration procedures alongside the guidelines for Takaful operation in 2013 while Tunisia has integrated a section in the insurance code for a legislative framework governing Takaful operation in 2014.
The breakdown of Takaful companies in the African region is as follows:
- Algeria – one
- Egypt – six
- Gambia – one
- Ghana – one
- Kenya – one
- Libya – two
- Mauritania – two
- Mauritius – one
- Nigeria – two
- Senegal – one
- Somalia – One Takaful company
- Sudan – 15
- Tunisia – three, and
- South Africa – two.
America and Europe also offer huge untapped potential for the Takaful market. Luxembourg already has an established Takaful company offering motor and home Takaful products since 2008. The conventional industry is playing a big role in enhancing and serving Shariah compliant products, for example, Swiss Life has launched its first Family Takaful products in Europe mainly to facilitate French customers looking for Islamic investment solutions.
The breakdown of Takaful companies in Europe and America is as follows:
- Luxembourg – one
- France – one
- Germany – one
- Canada – one
- US – one, and
- Trinidad & Tobago – one.
Generally, the Takaful industry has witnessed a favorable evolution process and today globally, there are 235 operators providing Islamic insurance products. Moreover, more than 50 Takaful operators will be established between 2016 and 2017.
The sustained double-digit growth in the Takaful market, along with the strong take-up of Islamic financing in both the retail and commercial space, presents opportunities for re-Takaful.
Global re-Takaful opportunities
According to the World Population Bureau, the population worldwide for 2014 was 7.2 billion, and the Muslim population was 2.05 billion which is 28.26% of the world’s total population. Africa and Asia have the largest Muslim populations, increasing at a rate of 1.84% per annum.
In the same year, the total population in Africa was 1.1 billion with Muslims numbering 581.58 million, 53.04% of Africa’s total population. It is clear that there is a scarcity of Takaful operators in Africa and this will lead to the establishment of more re-Takaful operators.
The world’s two billion Muslims signify a vast potential consumer base, and form a youthful and progressively prosperous society.
Globally, there are a total of 23 companies offering re-Takaful services based in only 10 countries and thus, opportunities exist for re-Takaful operators to assist the growth and expansion of the Takaful market.
Takaful firms are allowed by Shariah to reinsure a part of their risk through conventional business, a practice allowed under the concept of Darurah, or necessity. Based on the doctrine of necessity or needs (Hajah), the jurists allow reinsurance, but the allocation must be made within the limits (the exercise of Darurah must be made within its limits). However, this concept is gradually changing.
Reinsurer Swiss Re is in talks with Malaysian market players and the Malaysian Takaful Association to set up a re-Takaful pool market. Lloyd’s of London, which is also building its capacity in the sector, has opened an office in Dubai and is in talks with regulators to access the Malaysian market.
Dubai-based EmiratesRE, a re-Takaful firm with a paid-up capital of US$120 million, aims to conduct a capital increase exercise in 2017 to add new re-Takaful lines. PineBridge Investments, a New York-based asset manager, is exploring the launch of a re-Takaful firm in Dubai.
Salama plans to launch a Takaful firm in Egypt this year while Oman saw two such firms open in 2014 with a third one on the way. Turkey’s Doga Group is also planning to enter the Turkish market. Pre-emptive backing on the part of regulators and governments will go a long way in supporting the Takaful and re-Takaful industry.
The Takaful sector could also take the lead in providing solutions in light of universal trends such as longevity risk, escalating health costs and increased wealth, which are just as pertinent to its core Muslim market segment, and take advantage of opportunities in niche areas such as microTakaful.
Bilal Abdulaziz Laving is a Shariah coordinator of re-Takaful at Kenya Reinsurance. He can be contacted at email@example.com.