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Takaful Operators and the competitive market.


Fashola Olayinka Nurudeen.

Table of Contents
1.0 Introduction. ......................................................................................................................... 3
2.0 What is Takaful. ................................................................................................................... 4
3.0 Difference between Takaful and Insurance. ........................................................................ 6
4.0 Takaful, Unique Selling Propositions. ................................................................................. 8
5.0 Issues with Takaful Operators ........................................................................................... 11
6.0 Takaful Market Potentials. ...................................................................................................... 16
7.0 References. .............................................................................................................................. 18

1.0 Introduction.

After nearly three decades since the first Islamic insurance (Takaful) was introduced in Sudan in
1979, the concept of takaful seems to have gained wider acceptance and continues to develop.
There are over 179 Takaful windows and operators in the world, with about 69 in the Middle East,
27 in Africa, 56 in Asia Pacific and 27 in the rest of the world

In recent estimation of the global takaful market shows that it might achieve US12.5 billion of
premiums by 2015. This figure is a revision from an earlier similar estimate of US7.5 billion
forecasted by market analysts in 1999
. Several factors may have contributed to this faster growth
rate, which include increasing awareness amongst the Muslims of the Shari`ah-compliant risk
management options and of continuous effort made by takaful operators to enhance their product
coverage and distribution channels. Despite the tremendous development of the takaful sector, a
considerable number of issues (i.e. technical and Shari`ah) remain unsolved amongst operators.
These issues includes but not limited:
To failure of the takaful operator to clearly distinguish themselves from insurance operator.
Not having a unique selling propositions for takaful products.
Sharia related issues, choosing the appropriate business model among
Marketing and distribution
Technology platform

The purpose of this papers is to discuss these issues and proffer workable solutions that will ensure
that the takaful operator becomes more marketable and successful in a very competitive market
without going outside the core principles of Islamic finance.

The growing importance of Takaful insurance, by Ajmal Bhatty, President & CEO, Tokio Marine
Middle East, UAE. Presented at Asia Regional seminar organized by OECD and Bank Negara
Malaysia under the sponsorship of government of Japan, Kuala Lumpur, 23-24 September, 2010.
Razaleigh Muhamat, The Management of Takaful Business Models in Malaysia, Advance in
natural sciences ISSN 1995- 0772
2.0 What is Takaful.

Islamic finance has developed mainly in two directions namely Islamic banking and Islamic
insurance (Takaful). While information about Islamic banking is being increasingly disseminated,
features, models and structures of Takaful are little known.

Takaful is the Islamic alternative to conventional insurance which is based on the idea of social
solidarity, cooperation and joint indemnification of losses of the members. It is an agreement
among a group of persons who agree to jointly indemnify the loss or damage that may inflict upon
any of them out of the fund they donate collectively (Maysami et al., 1997).

The main purpose of takaful under the Islamic system, is to bring equity to all parties involved,
and the objective of the contract is to help the policy holder through bad times. Profit earnings is
not the main goal, while sharing any profits generated incidentally is acceptable (Maysami and
Kwon, 1999).

The origin of Islamic insurance started before the era of the Holy Prophet Muhammad (S.A.W)
which is based on Aqilah mutual co-operation (Klingmuller, 1969). Later such insurance
transaction was steadily practiced and was even made mandatory in some cases during the period
of the second Caliph, Saydina Omar (R. A .A). During the period of 14th to 17th century a Sufi
Order of the Kazeeruniyya was very active especially in port cities in Malabar and in China. This
order served as a kind of marine travel insurance company.

In 19th century, a Hanafi lawyer Ibn Abidin (1784 -1836) was the first Islamic scholar who came
up with the meaning, concept and legal entity of insurance contract. He was also the first person,
who repeated the word insurance in the context of a legal constitution, and not in a customary
practice (Klingmuller, 1969). In 1906, Muhammad Baqit Mufti of Egypt approved the idea of
insurance which was explained by Ibn Abidin. In the period of twentieth century, a well-known
Islamic jurist, Muhammad Abduh issued two fatwas mentioning that an insurance transaction is
like the transaction of al-mudaraba
financing technique, while the other was that a transaction
which is similar to endowment or life insurance are legal.

To consider insurance as Islamic mode of risk sharing efforts were made in late 1970s. The first
Islamic insurance company, known simply as the Islamic Insurance Co. Ltd, was established in
Sudan in 1979. This company was able to distribute profits to its shareholders at the rate of 5% in
1979, 8% in 1980 and 10% in 1981. Following the success of the insurance company in Sudan,
other Islamic insurance (takaful) companies were established in Islamic and in non-Islamic

Mudaraba is a contract whereby one side the investor or Rabb ul Mal contributes money and the
other side work, being the manager or Mudarib. The Rabb ul Mal bears all losses, and the Mudarib
earns a profit share.
3.0 Difference between Takaful and Insurance.
Though takaful is sometimes called Islamic insurance but in the real sense of its not. There are a
lot of difference between them, these are listed below.

S/N Conventional Insurance Takaful
1 It is a Risk Transfer mechanism
whereby risk is transferred from the
policy holder (the Insured) to the
Insurance Company (the Insurer) in
consideration of 'insurance premium'
paid by the Insured.
It is based on mutuality; hence the risk is not
transferred but shared by the participants
who form a common pool. The Company
acts only as the manager of the pool (Takaful
2 It contains the element of uncertainty i.e.
"gharrar" which is forbidden in Islam.
There is an uncertainty as to when any
loss would occur and how much
compensation would be payable.
The element of 'uncertainty' i.e. 'gharrar'
isbrought down to acceptable levels under
Shariah by making contributions as
"Conditional Donations" (tabarru) for a good
cause i.e. to mitigate the loss suffered by any
one of the participants

It contains an element of gambling i.e.
"maisir" in that the insured pays an
amount (premium) in the expectation of
gain (compensation/payment against
claim). If the anticipated loss (claim)
does not occur, the insured loses the
amount paid as premium. If the loss
does occur, the insurer loses a far larger
amount than collected as premium and
the insured gains by the same.

The participant pays the contribution
(tabarru) in the spirit of Ne'ea (purity) and
brotherhood; hence it obviates the element of
'maisir' while at the same time without
losing the benefit of Takaful in the same way
as conventional insurance.
4 Funds are mostly invested in fixed
interest bearing instruments like bonds,
TFCs, securities, etc. Hence these
Funds are only invested in non-interest
bearing, i.e. riba-free instruments
contain the element of "riba" (usury)
which is forbidden in Islam.
5 Surplus or profit belongs to the
Shareholders. The insured is covered
during the policy period but is not
entitled to any return at the end of such
Surplus belongs to the participants and is
accordingly returned to them (in proportion
to their respective shares of contributions) at
the end of the accounting period.

4.0 Takaful, Unique Selling Propositions.

Takaful and Takaful products have its own unique selling propositions
these are the features that
makes it stands out when compared with conventional insurance which is the main competitor to
takaful. Below are some of those USP explained in details, thus it can be said that takaful has a
strong USP to attract more customers into buying the product.

Joint Guarantee/Taawun
Takaful is conceptually defined as an Islamic financial protection system which involves a joint
guarantee scheme in providing possible indemnity or contingency but conventional insurance is
based on compensation of loss in exchange of premium which is paid by insured (Billah, 2003).
Takaful operation is based on the concepts of taawun (mutual help or co operation) solidarity,
trusteeship, and brotherhood but conventional insurance is based on to take material gain on behalf
of other (Yusof, 1996; Azman 1997; Maysami and Kwon 1999; Billah 2003).

In Islamic society Takaful system worked on the basis of Taawun and Tabarru. Participants
mutually agree to help and guarantee each other by collecting contribution from individual, for the
sake of mutual cooperation. Literally, insurance is worked on risk transferring process under which
one protects themselves on behalf of others (Maysami and Kwon 1999).

The main purpose of Takaful under the Islamic system is to bring equity to all parties involved,
and the objective of the contract is to help the policyholders through bad times. Profit earnings is
not the main goal, while sharing any profit generated incidentally is acceptable but in conventional
system business is started with the aim to earn profit (Maysami and Kwon 1999).

Social Solidarity/ Shared Responsibility

The factor or consideration presented by a seller as the reason that one product or service is
different from and better than that of the competition
Takaful, the Islamic alternative to conventional insurance is based on the idea of social solidarity,
cooperation and joint indemnification of losses of the members. It is an agreement among a group
of persons who agree to jointly share responsibility of loss or damage that may inflict upon any of
them; out of the fund they donate collectively but in conventional setup loss is indemnified by the
insurance company according to the terms and condition of the policy (Maysami et al., 1997).
Takaful insurance has grown not only as an innovative financial instrument, but also on religious
consideration (Maysami and Kwon, 1999). The contract of takaful provides solidarity in respect
of any tragedy in human life and loss to business or property (Ayub, 2003). The Islamic model of
insurance policy is based on the fundamental principle of mutual cooperation and solidarity, as
ordained by Allah (SWT) mentioned to this effect in the Holy Quran (Maysami and Kwon, 1999).
But for conventional insurance there is no any religious boundaries and the purpose of insurance
is to protect risk-averse from suffering the full cost of those actions on the part of nature which
affect them unfavorably.

Concept of Aaqilah
Takaful is not a modern concept in Islamic commercial law. The current jurists acknowledge that
the foundation of shared liability or Takaful was laid down in the system of Aaqilah, which was
an arrangement of mutual help or indemnification customary in some tribes at the time of the Holy
Prophet (S.A.W). In case of any natural disaster, every person used to contribute something until
the loss was indemnified. Takaful is basically based on the idea of Aaqilah for the payment of
blood money wherein payment was made by the whole tribe. Islam accepted this principle of
mutual compensation and joint liability (Billah, 1998).

Risk Distribution
The conceptual difference between Takaful and conventional insurance is that risk in Takaful is
not exchanged by way of contribution payments made to operator which means operator is not
selling and participant is not buying any risk coverage. Operator is playing the role of fund
manager on behalf of the participant. So operator is not undertaking risk, the risk is however,
distributed among the participants who agreed to jointly assume the risk (Yusof, 1996; Maysami
and Kwon 1999; Billah 2003b).
Under conventional framework Insurance is a contract between two parties, whereby first party
agrees to undertake the risk of other party in exchange of premium and the other party promises to
pay fixed sum of money to the first party on the happening of uncertain event with in a specific
duration (Spence and Zeckhauser,1971).

5.0 Issues with Takaful Operators

There are several issues with the operators of takaful companies, below are some of the issues that
are currently being faced by the operators of the takaful business.

Awareness Remains a Key Issue
There continues to be some confusion and lack of knowledge about the takaful operating models
and product features as well as the differentiation between takaful and conventional insurance. The
lack of awareness in certain markets is adversely affecting the growth of takaful, family takaful in
particular, as many Muslims remain reticent about the concept of life protection.
A survey of takaful participants' perceptions in Saudi Arabia unveiled at the International Takaful
Summit showed that respondents had a limited knowledge and awareness about the principles of
takaful products. This implies that pertinent information about the products was not explained to
customers properly.
To raise the awareness of takaful and to promote full transparency, education is extremely
important for consumers to be in a better position to select insurance or takaful products that best
meet their needs as well as to understand their rights and responsibilities as consumers.
Hence, finding the right value proposition for takaful, especially in markets with well-established
conventional players as well as raising takaful awareness amongst individual consumers remain
the major challenges.

The Right Offering for the Right Customer
One way of differentiation is through product innovation, where simple and transparent products
that address the specific needs of takaful customers would go some way to increasing its visibility.
Lines of business where this can be realised are in long-term savings products that can be tailored
for the evolving needs of the largely young and challenging GCC population with increasing
awareness levels and education about financial protection.

Takaful operators have surely realized that one size doesn't fit all as far as product development is
concerned. The emergence of new customer segments, with higher levels of awareness, require
innovative approaches in targeting them, by addressing their specific needs and preferences as well
as building better customer relationships through effective communication tools, such as customer
profiling, continuous updates and timely reporting.
Products built around customers, such as bundled protection coverage - examples are travel
insurance with additional protection for travel; credit life insurance to insure repayment of loans;
and women's illness plans covering specific diseases like breast cancer - are emerging and
increasingly becoming popular. Other tailored products are being introduced include women's
plans and affluent plans with individualized protection including critical illness cover, travel cover
and children's protection.

The underpenetrated life insurance market in the GCC has an immense growth potential for family
takaful products. The segment is witnessing stable growth with the increasing awareness of
financial planning and protection needs. The GCC family takaful share is still insignificant at 5%
of total contributions, but studies show that it is undeniably the line of growth for the future.

According to a 2011 Alpen Capital report on the GCC insurance sector, life insurance in the GCC
will witness a significant growth driven by increasing per capita income and favorable
demographics. The life market is expected to see tremendous growth as companies develop a wider
range of products and better distribution channels. This will make the market increasingly
attractive for insurance companies and offers customers the prospect of products that are tailored
more precisely to their needs and delivered with a higher standard of service.

There are plenty of opportunities for takaful operators to explore as the family takaful segment,
pensions, and wealth management solutions are still underdeveloped, especially in the investment-
linked and annuities product categories. Other business lines such as corporate and SME also
remain underdeveloped although major opportunities exist for takaful companies to work hand in
hand with Islamic banks in the area of project financing. Special attention is also needed to develop
micro takaful solutions.

Channel and Pricing Management.

It's evident that product development is a key growth driver for takaful, but even with the best
products around, it's crucial to have effective and efficient distribution channels that will ensure
that these products reach the right customers.
Bancatakaful has been gaining ground in the GCC, and has been leading the distribution of takaful
products, particularly family takaful offerings that are embedded within wealth management.
However, takaful products have still to compete for shelf space with other bank products including
conventional bancassurance products. Extensive efforts are still needed to develop product
delivery applications designed to enhance customer convenience and overall service quality.

Pricing too remains a challenge. In certain markets where pricing is not dictated by the regulator,
commission arbitrage comes into play. So pricing is important because takaful providers gain
market share by pricing their products competitively or offering special deals. Of course, that can
be beneficial only for a limited period, because at the end of the day it will have an impact on the
takaful operator's bottom line.

Customer Excellence

In an increasingly competitive market, many industry leaders are embracing innovative tools to
deepen existing relationships and improve new customer acquisition rates, realizing that efficiency
can be achieved through investment in systems and operational and service infrastructure.

Successful distribution models in a number of Islamic countries have rapidly identified that call
centers, direct sales team, internet and mobile phone services can offer distinct advantages to
elements of the sale process, over a personal-contact-only strategy. This is particularly apparent as
the needs of wealth management and financial planning become more widespread throughout all
customer segments.

Improving Depth of Islamic Financial Markets.

A key challenge for takaful operators remains the lack of suitable Shariah-compliant investment
options, especially as the takaful sector's growth rates and profitability are under pressure, the need
for investment products with yields higher than cash is increasing.

The Shariah-compliant investment universe is slowly evolving and has expanded away from equity
to new asset classes, including Islamic money market, commodities, real estate and alternative
investments. There also has been significant growth in sukuk funds as investors become more
sophisticated in their asset-allocation decisions, and search for higher returns.

Consequently, assets of sukuk mutual funds based in the Gulf grew to more than USD 500 million,
a 31% increase in one year, according to Reuters calculations based on data from fund companies.

The Gulf sukuk market is reviving and issuance is thought to be set for an upward trend. USD 6
billion of sukuk were sold across the GCC in the first three months of 2012, compared to USD 7.3
billion issued in the whole of 2011, according to Emirates NBD data. While sukuk have been
issued mainly by the public sector, private companies have begun to issue Islamic bonds, including
the USD 400 million sukuk announced in January by Majid Al Futtaim Holding, based in Dubai.

The increasing popularity of sukuk funds is also prompting major GCC banks, such as National
Bank of Abu Dhabi, HSBC, Al Hilal Bank and Rasmala Investment Bank, to launch their own
sukuk funds.

Shortage of Human Capital and Technical Expertise.

The lack of human resources dedicated to takaful is one of the major weaknesses of the industry.
The backgrounds of underwriting, accounting and marketing staff are in conventional insurance.
A shortage of Shariah competence also causes setbacks for the takaful industry. It is therefore of
paramount importance that the talent pool of trained personnel available to takaful operators
grows, including the number of non-Muslim insurance personnel knowledgeable about takaful

The industry has often been criticized for spending too little on training and education. People
selling takaful products hardly know the real benefits and differentiating features of takaful versus
conventional products. A number of GCC operators have realized this shortage and started
investing in education and awareness initiatives.

Conducive Regulation a Key Driver

Most GCC regulators have been and continue to be proactive in developing frameworks to regulate
the takaful industry. In the UAE, the Insurance Regulatory Authority issued a circular in
September 2011 to all insurance and takaful companies setting out guiding rules that they should
adhere to for their bancassurance business. The Saudi Arabian Monetary Authority directed all
operators to align with the cooperative insurance model by the end of 2011. Takaful operators had
to adjust their internal accounting structures, remove the use of Wakala and Qard and amend
product terms and conditions. This shift away from the pure takaful model may have various
effects on the industry, especially because Saudi Arabia is the largest takaful market in the world.

Oman's Capital Market Authority is reviewing an application from the first takaful operator, Al
Madina Gulf Insurance, but the market might take time to pick up, as only fully fledged takaful
companies will be allowed to offer Shariah-compliant products; Islamic windows for conventional
insurance companies are not permitted in the sultanate. The CMA is also in the process of
finalizing the regulations and standards required for takaful operations.

While the new regulations are seen a positive development, the increased variances in regulatory
regimes across jurisdictions could make it difficult for takaful operators to function across regions
and also lead to confusion for customers and multinational insurers.

6.0 Takaful Market Potentials.

Though the market takaful market has some issues/ challenges as highlighted previously, there are
lots of potential in the market as well. The takaful market is currently concentrated in Malaysia
and the Middle East and has been experiencing significant growth rates. There are currently more
than 130 takaful companies in operation worldwide, of which nearly half are to be found in the
GCC countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE. The takaful growth
rate in these countries is well ahead of the conventional insurance market in the region. With regard
to takaful, the market is expected to be worth $4 billion in the next few years at the present rate of
expansion, compared with about $170 million today

In some countries with majority Muslim populations, such as Nigeria, Pakistan, Egypt and
Bangladesh, the takaful market can be considered very much in the embryonic stage. These are
almost totally untapped markets, in which insurance penetration hovers somewhere below 2% of
. Globally, some estimate that the global takaful industry is growing at 20% per year, far
outstripping the 2.5% annual growth for conventional insurance premiums.8 Moodys has
predicted that global takaful premiums will rise to $7bn by 2015.9 The international rating
agencies have also taken a keen interest in the development of the takaful industry. For example,
the credit-rating agency Standard & Poors applies the same analytical process for takaful
businesses as for conventional insurers, but will also take into account factors like the takaful
sectors positive growth dynamics
. In terms of the governance structure, takaful companies have
the same structure as conventional insurers but also have an independent Shariah board.

The role of this board is to ensure that the processes, investments and products of the takaful
company are Shariah compliant. The worlds 1.5 billion Muslims11 represent a potential customer
base that no insurer can afford to ignore. Unlike most Western countries, the bulk of the worlds
Muslim population is youthful. In fact, 60% of the global Muslim population is under 25 years of

Standard & Poors, Islamic Finance Outlook, 23.04.07.
Morgan Stanley, Takaful Insurance: an Introduction, 29.04.08.
Standard & Poors, Islamic Finance Outlook, 23.04.07.
age8. This youthful population is starting to achieve a certain level of affluence and if it can be
captured early, has the potential to be a customer base to be retained for 40 years or more. The
under-insured status of most Muslims is also a significant enticement to potential takaful operators.
Taken as a percentage of GDP, premiums in the developed world, including Japan and the Asian
Tiger Economies, average 9.3%. In the Middle East, Africa, South and East Asia, premiums
amount to only 3% of GDP. Growth forecasts for takaful vary, but the consensus amongst most
market forecasters is for the current level of worldwide contributions written by takaful insurers,
estimated at roughly $2.0 to $2.6 billion as of 2006, to soar to $7.0 billion or more by 2015.12
This is well on its way to becoming a reality, for the forecast of $2.1 billion
in contributions by
2010, which was published by Asian Insurance Review a decade ago
, has already been surpassed.
However, when compared with the $3.7 trillion level of global premiums for conventional
insurance, the enormous growth potential for takaful becomes obvious. Insurers and customers are
starting to realise that:
There is a significant market for takaful;
takaful products can be price competitive with conventional insurance products;
takaful is inherently ethical and is obliged to invest in ethical products. Further if the takaful
business makes money, it gives a share of this surplus back to the policyholders.

This combination of ethical investment policy, significant growth potential and price
competitiveness makes for a compelling business proposition to non- Muslims as well, in the UK,
the rest of Europe and the US. This is a strong driver in markets where the majority of the
population is not Muslim. There are two million Muslims in the UK and 20 million in Europe,
while in the US the estimates range from 2 million to 6 million
. But if non-Muslims seeking an
ethical investment come in as takaful customers, the market then becomes one of almost 60 million
in Britain and some 450 million in Europe.

CIA World Factbook (, 12.06.08.
Morgan Stanley, Takaful Insurance: an Introduction, 29.04.08.
Asian Insurance Review, Takaful growth forecasts, 1998.
Muslims in Europe: Country guide (, 23.12.05.
7.0 Conclusion.

The market potentials for the Takaful business is by no means very high and competitive
considering that the market is almost saturated with the conventional insurance that has been is
existence for hundreds of years. The Takaful market is relatively new and needs to do more in
order to achieve the full market potentials. To ensure that the operators of the takaful company
succeed in the market the following point should be considered.
Increase market penetration by selling and highlighting the USP Unique Selling
Proposition of the takaful market.
Play less on the fact that its Islamic insurance but play more on the fact that this is an
alternative to the conventional insurance.
Highlight the compact risk management framework that is inherent in the takaful business
The takaful business model is more human friendly and its always a win-win situation that
plays out.

8.0 References.

Ayub, M. (2003). An introduction to Takaful an alternative to insurance. Islamic Banking
Department, State Bank of Pakistan, Karachi. p.3.

Billah, M. M. (2003). Islamic Insurance (Takaful). Ilmiah Publishers, Kuala Lumpur,

Klingmuller, E. (1969). The Concept and Development of Insurance in Islamic Countries. Islamic
Culture, Vol. XLIII.

Maysami, R. C., Golriz, H. and Hedayati, H. (1997). Pragmatic Interest-free Banking:
Metamorphosis of the Iranian Financial System. Journal of International Banking Law, 12, 92

Maysami, R. C. and Kwon, W. J. (1999). An analysis of Islamic Takaful insurance- a cooperative
insurance mechanism. Journal of Insurance Regulation 18: 109132.

Maysami, R. C. and Kwon, W. J. (1999). An analysis of Islamic Takaful insurance- a cooperative
insurance mechanism. Journal of Insurance Regulation 18: 109132.

Maysami, R. C., Golriz, H. and Hedayati, H. (1997). Pragmatic Interest-free Banking:
Metamorphosis of the Iranian Financial System. Journal of International Banking Law, 12, 92

Spence, M and Zeckhauser, R. (1971). Insurance, Information, and Individual Action. (Source:

Yusof, M. F. (1996). The Concept and Operational System of Takaful Business. New Horizon: