Saudi Arabia, with contributions totaling $2.9 billion in 2008, and Malaysia with $900 million, are seen as the top two Takaful markets in the world. Sudan is the most significant market outside of the Gulf Cooperation Council (GCC) region and Southeast Asia, with contributions totaling $280 million in 2008.
Global compound annual growth rate for Takaful was 39 percent for the period 2005-08. The Levant region and Africa grew at 18 percent, the Indian Subcontinent at 135 percent, Southeast Asia at 28 percent and the GCC at 45 percent.
The UAE was the fastest growing Takaful market in the world with a compound annual growth rate of 135 percent from 2005-08, while Indonesia rose quickest in Southeast Asia at 35 percent.
"Globally, performance has been mixed. Yields realized by GCC operators have been comparably high but volatile, while Malaysian operators have posted stable returns driven by better underwriting results," said Sameer Abdi, head of Ernst & Young's Middle East Islamic Financial Services Group.
"In terms of operating efficiency, average combined ratios of GCC firms have continued to improve and reached 72 percent in 2009 (the latest year for which data is available), indicating improving operational efficiency. The figures seem to indicate that while the industry may seem to be temporarily bogged down by market troughs, the long-term outlook seems very positive."
Compulsory medical insurance requirements in Saudi Arabia have contributed to growth in family and medical Takaful, which together are estimated to bring in 49 percent of gross contributions in the Middle East and North Africa (MENA) region.
Family Takaful is estimated to provide only five percent of these total contributions. Southeast Asia is the most highly penetrated family and medical Takaful market, bringing in 73 percent of net contributions in 2008.
Contributions from family Takaful in this market are much higher and accounted for 73 percent of net contributions in Malaysia in 2008. Both family and medical Takaful continue to grow strongly, with the MENA region following the growth trends witnessed in Southeast Asia.
Comparatively high rates of real GDP growth, a decreasing government safety net, coupled with low insurance penetration and favorable demographics, suggest strong future growth in the MENA region.
While industry growth remains strong, the challenge for operators is to balance profitability through their early years of development. Unsurprisingly, the primary challenge remains the shortage of skilled professionals across all key functions - underwriting, risk management, claims management and technology deployment.
Underwriting losses remains a source of worry for most operators and specialization could be the answer. Enhancing their understanding of the customers, sectors or geographies, and therefore improving their risk analysis and pricing, could yield quick results.
"It's worth noting that most Takaful operators are yet to achieve critical business volume, despite incurring substantial establishment costs over the years. Most Takaful firms are startups or small players with limited access to quality business," said Abdi.
"It's important that they rethink their go-to-market approach if they want to achieve critical mass and become sustainable in the long run. A lot of priority should be given to controlling operational costs. For example, outsourcing arrangement for back-office operations can make a sizeable difference in creating leaner and more efficient operations."
Abdi added that although the future offers scope for strong business growth, the real challenge is to achieve growth with profitability.
"This is in the backdrop of the basic underwriting capacity at many of the Takaful operators, the impact of which has been exacerbated due to heavy losses on the investment portfolio," he said.
"We are entering a new and changing world, where quality of strategy execution and stronger capital planning are at the top of the management agenda. The industry has certainly shown resilience during the global financial crises. It's about time that the industry lobbies for deeper local Islamic capital markets and diversifies its business mix in favor of areas with sustainable growth potential.
"Locally in the GCC, we expect some consolidations across several markets over the next three years, leading to the creation of financially stronger market leaders."
