Islamic insurance, or takaful, which emerged in the 1970s in its modern manifestation, has developed as a form of sharia-compliant insurance based on the principle of shared ownership of the insurance fund by the policyholders. It originates from Arabic word Kafalah, which means, “guaranteeing each other” or “joint guarantee”. Under takaful, any cash surplus at the end of the year is returned to policyholders in the form of cash dividends. The activities of shareholders are separated out as they make a percentage of the profit on investments made by them on behalf of the fund.
The takaful market is estimated to be worth $2bn globally and premiums are expected to reach $7.4bn by 2015. The Middle East is currently an area of rapid expansion witnessing annual growth of 15 to 20%. Takaful has grown with the expansion in other Islamic financial services, as these provide the platform for takaful companies to invest in sharia-compliant funds.
The UAE itself is a nascent market with very few major players. There are 49 insurance firms in the emirates and only three are dedicated takaful companies, two in Dubai and one in Abu Dhabi.
Both conventional insurance and takaful companies have a fairly high-risk exposure in the UAE as they are largely reliant on local stock markets as the primary source of income for shareholders. This could restrict the growth of the takaful industry in Abu Dhabi, as there is a limited number of sharia-compliant investment vehicles.
Takaful also suffers because of a lack of awareness amongst customers about the industry. There is a need for greater product innovation and development. According to many analysts, takaful products must be cost competitive against conventional products as well as offering the same quality. Otherwise, they will fail to compete even if they do appeal because of their sharia compliancy.
The conventional insurance industry does not appear concerned by the possibility of losing market share in Abu Dhabi to takaful companies. One leading insurer told OBG, “Takaful is a small area. It is currently worth about $350m a year and it will probably grow by a single-digit figure each year but it will never make dramatic double-digit growth.”
Nevertheless, the industry within the UAE continues to grow. According to a report by the Dubai-based Salama Islamic Arab Insurance Company, “mainstream commercial insurance accounts for about 50% of the business in the region. However, for the past 10 years, in all markets in the region, personal lines have been growing faster than commercial lines. The strongest area of growth is in the provision of personal insurance cover. Many providers have also experienced an increase in revenues from family takaful, health takaful and education.”
This bodes well for the industry. Abu Dhabi National Takaful Company, the only Islamic insurance company in the emirate, continues to perform positively. In the third quarter of 2006, the company experienced a net profit margin of almost 11% and a return on equity of 5%. It also had a return on assets of just over 2%. The company recently announced it will pay a 5% cash dividend for the year 2006. In 2005, the company had profits of $6.26m.
This steady development is indicative of the industry as a whole within the UAE. Although it continues to grow, it is not yet experiencing the same level of growth as other Islamic financial services. Moreover, consumer interest in takaful remains relatively muted in comparison to other countries in the region such as Bahrain and Kuwait. Nevertheless, there is substantial potential for growth in the industry.
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