In Islamic finance, for instance, many commercial transactions including real estate, trade finance, projects and so on are now required inter alia to have where relevant building and contents insurance; insurance of goods during transit; full insurance coverage for the concerned financed assets or for the client's assets if proceed of such insurance is assigned to the financier; and third party liability insurance coverage that covers risk arising from the use of the assets owned by the financier and leased to its client.
However, many of the Islamic finance transactions do not have the relevant Islamic insurance or Takaful wraps. Instead they have conventional insurance cover. This reflects the under-developed connectivity between Islamic finance and Takaful; the underdeveloped nature of the Takaful providers which is characterized by short-termism and very low capitalization; and therefore under-utilized capacity and potential of the global Takaful industry, especially in the commercial and credit risk Takaful sector.
Last Friday a new company, GNL Insurance, was launched in London which claims to be the "world's first Shariah-compliant insurance broker to offer premium Takaful and Re-Takaful commercial risk solutions in the UK".
The idea is to start closing the gap of this disconnection between Islamic finance and Takaful, backed by the long history, experience and underwriting capacity of London as the premier insurance center of the world.
GNL Insurance, which is a joint venture between Gatehouse Bank PLC, a City-based wholesale Shariah-compliant investment bank authorized by the UK's Financial Services Authority (FSA), and Paul Napier Ltd., a Lloyd's Insurance Broker also based in London, will provide a global gateway for corporate and institutional clients seeking commercial risk protection, with its initial mandate being to focus on the management and provision of risk protection for Real Estate, Trade Finance and Financial Institutions.
In fact, GNL Insurance, which is regulated by the FSA, embarked on this venture after being encouraged by its Shariah board, led by Sheikh Nizam Yaquby, to develop Takaful products which would indeed provide commercial risk and credit risk insurance for Islamic financial transactions and institutions - a vastly untapped market. In reality, Islamic financial institutions (IFIs) leave it up to their clients to decide which type of insurance they wish to use for any of the financing facilities extended by these IFIs.
On the other hand, IFIs and their clients have been complacent and found it too easy to use conventional commercial risk insurance.
Because of the general absence of such Takaful products, which have hitherto concentrated on family (life) Takaful products and general Takaful products such as motor car, marine, fire and third party, many clients who use Islamic financing facilities stress that they are obliged to use conventional insurance. However, many of them stress that they would be prepared to migrate to commercial risk Takaful should such products come to the fore albeit they also have to be competitive in their premiums and in the provisions of underwriting policies and claims.
The nascent global Takaful industry comprises largely family Takaful and general Takaful. The Malaysian Takaful industry, according to the Bank Negara Malaysia 2010 Annual Takaful Statistics, experienced a compound average growth rate of 27 per cent in terms of net contributions between 2005-2010, with family Takaful driving the growth at 28 percent for the same period, to dominate more than 80 percent of the total Takaful market in 2010. Total Takaful net contributions in 2010, according to Bank Negara, amounted to RM4.406 billion; while total Takaful fund assets amounted to RM14.691 billion in 2010, which represents a mere 8 percent of the total insurance market in Malaysia.
In contrast, family Takaful remains a small line of business in the MENA region, taking a 5 percent market share in 2010, according to the 2011 World Takaful Report by Ernst & Young. The report projects that the global Takaful industry is on course to reach $12 billion in 2011, which is extremely modest compared to the multi-trillion dollar conventional insurance industry. Gross Takaful contributions for the GCC in 2011 are forecast to reach $8.33 billion despite an economic slowdown in the region. None of the above even begin to consider commercial and credit risk Takaful.
GNL Insurance stresses that it has already identified a notable absence of high quality and significant Takaful capacity for commercial assets held by Shariah-compliant financial institutions. Nor surprisingly, its initial strategy is to target the business of some 250 Islamic financial institutions worldwide but mainly in the MENA region and ASEAN.
"Takaful and Retakaful (reinsurance) all put their large risks through the conventional market," explains Richard Bishop, CEO of GNL Insurance. "What we want to do is to make the entire process on a Shariah-compliant basis. What we are saying is that we are going to bring for the first time ever capacity and the whole cycle in a Shariah-compliant way. The issue is that in the Takaful documentation at the moment the underlying insurance is not Shariah-compliant. It is conventional. We will bring in a Shariah-compliant conventional capacity."
In fact, GNL Insurance pre-tested its platform to a few trusted clients and has actually sold a number of policies to a limited number of clients in the GCC and East Asia.
IFIs such as Gatehouse Bank, which has to date completed more than GBP200 million Shariah-compliant property acquisitions in the UK, stress that hitherto they did not have the option to undertake Shariah-compliant, commercial risk protection. The reality is that few Takaful operators provide Shariah-compliant insurance for commercial property, trade, project finance and sukuk.
GNL Insurance is effectively operating as an independent Shariah-compliant broker offering the corporate and institutional market access to premium Takaful product solutions on behalf of its clients. It is doing this in partnership with Chartis UK, a prominent UK commercial risk insurer, which has access to huge underwriting capacity and the relevant backing of assets, with the entire process being Shariah-compliant.
"We have been looking at the Takaful market for some time particularly with respect to large commercial risks," confirms Jason Harris, executive director for commercial lines at Chartis UK. "Working with GNL Insurance allows us to leverage the capability Chartis has built up in Bahrain allied to our strengths in commercial insurance to offer Shariah-compliant products to a market which has been expanding in the UK market in recent times."
The GNL platform is effectively a global platform, stresses Richard Bishop. London has developed its strength as a leading western center for Shariah-compliant finance, with its regulatory framework, infrastructure and attractiveness as a location for direct investment by Shariah investors. This venture, he contends, "will introduce a new dimension to the Shariah-compliant institutional market with Takaful solutions that provide risk protection for large commercial assets in London and the rest of Europe. That is what London is about. There is no reason why London cannot become the natural home of Takaful to complement its long history in insurance. Similarly, London has a level of experience and capacity which does not exist anywhere else in the world. But, ultimately there will have to be support from both sides of the equation - the insurance providers in London and the buyers that would want to come to London."
GNL Insurance, he adds, is pioneering genuine product development with leading global risk providers and the approval of Shariah scholars. "We set an ultimate objective, as an FSA regulated entity, to see GNL Insurance deliver a price competitive, quality Takaful offering to the market," he says.
In terms of regulation, tax neutrality, insolvency rules and claims, London is best positioned for insurance and this will be same for Takaful. London at the same time has a an opportunity also to create a standard documentation for commercial and credit risk Takaful, effectively a Takaful Standard akin to an Insurance Standard based on English law, which is the preferred legal jurisdiction for most cross-border Islamic financial transactions.
"The Takaful capacity that we have developed is for recognized commercial risk - large real estate risk, large construction projects, large financial institution exposures, those are the areas where the purchasers are fairly well educated because they all employ Shariah boards that are encouraging them to look at these activities. We feel local markets are not sophisticated enough to deal with large commercial risks. When we talk to the local Takaful companies in the Middle East they recognize that they are not yet developed enough to reach the level to underwrite such risks," explains Richard Bishop.
He remains confident that the commercial risk and credit risk Takaful can be sold to any institution irrespective of religion or creed, provided the cover and documentation is correct.
The potential for commercial risk and trade-related Takaful is huge. The total trade of the 56 IDB member countries in 2009 amounted to $3.374 trillion. Takaful for certain types of sukuk transactions is also a major market especially offering third party guarantees and cover. The volume of sukuk issuance in 2011 is projected by the CIMB Group to grow by 29 percent in 2011 compared with 2010 to reach $22 billion. The upswing in corporate spending, an increase in issuers seeking funding diversification and improving investor sentiment in the Gulf are also expected to fuel the sukuk market globally.
However, for commercial risk and credit risk insurance to flourish would require a substantive market education which would include the need to educate the Shariah advisories about the importance of commercial and credit risk insurance; educating the financial institutions and the Takaful companies themselves; and educating the conventional insurance industry which has the underlying capacity and assets to offer a comprehensive Shariah-compliant solution.
