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Takaful Operators Urged to Stress Unique Value of Their Mutual Model

The unique mutuality principle of takaful, or Islam-based insurance, is the key to promoting new business in light of increasing competition from traditional insurers and a difficult operational environment, according to an Islamic financial services consultant.

In this specialized market segment, customers need to know more about the mutuality concept rather than price, said Ashar Nazim, director of Islamic financial services group at consultancy Ernst & Young. Takaful operators are easily hung up in the competition for price and market share, though the most valuable part of this insurance model is overlooked.

The conventional cooperative nature of Shariah-compliant insurance is a proposition takaful operators can offer consistently through business mixes in underwriting, distribution and marketing, according to Nazim. Customer loyalty on takaful principles is a critical benefit for the market's development. Takaful operators "have done beautiful strategic plans on paper," said Nazim, but when it comes to implementation, it is easy to move away from elements of the plan. In managing competition, Nazim said strategy execution and accountability are key to building business in the long term.

The global takaful market grew 29% to US$5.3 billion in contributions in 2008, and it is expected to surpass US$8.8 billion in 2010. Without a distinctive differentiation on model value, Nazim said "we do not want to see" the US$8.8 billion takaful industry only in absolute terms.

Takaful growth has remained promising, driven by strong fundamentals such as high rates of gross domestic product growth, low insurance penetration, favorable demographic structure and decreasing government social subsidizes, according to an Ernst & Young report. However, operational constraints need to be addressed to capitalize on long-term potential for takaful business.

Takaful is still a very young sector with new operators entering the markets globally. Many operators are now moving from initial business setups to the next stage, with the focus on operational management, noted Nazim.

With a focus on quality, Nazim said diversification and specialization are key strategic topics for takaful operators to achieve operational value. Operators seek to diversify business lines to include more new products or market segments. Specialization by business lines or industry sectors also addresses complex risk solutions.

No matter on which strategic focus, takaful operators need to have a clear understanding of local market needs and set priorities in strategic execution and unique model positioning, according to Nazim.

Nazim said each takaful model has its unique proposition for the market. The variety of models is "a good thing" for the industry for innovation, he added.

With an increasing complexity of risks for industry sectors such as marine, energy and construction, Nazim noted retakaful (reinsurance) demand is growing, with most of the business picked up by international reinsurance companies.

Regional and local retakaful operators are developing their business. Malaysia is the most active market for local and regional retakaful operators. The challenge is more for primary takaful operators, who need to manage their risks even though they may not have the internal structure for the task, according to Nazim.

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Recent economic events are driving a constructive evolution of regulatory frameworks which would alter the way the takaful industry operates. A consultative approach will be key to directing the still-evolving takaful industry, said Ernst & Young in its report. Industry must play a more active role to facilitate more consistent regulatory, legal, accounting, capital markets and tax regimes.

Regulators are closely looking at what kinds of capital requirements the takaful market would need, said Nazim. In Malaysia, the regulator is moving toward a risk-based capital requirement for takaful operators.

In the Gulf Cooperation Council countries, regulations vary significantly across the region as regulators define acceptable takaful business models for their jurisdictions. However, Ernst & Young said in its report that a Shariah governance framework is yet to be implemented in its true spirit.

In the past five years, GCC countries issued a large number of new insurance licenses. Deteriorating market conditions have led regulators to restrict further licenses instead of encouraging consolidation, said the report. GCC countries include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

International insurance companies are seeking growth through investment in emerging markets with the takaful approach being actively explored. Newly established operators have sought to capture market share through aggressive price strategy, according to Ernst & Young.

In combating rising competition, the report said takaful operators could consider quickly building critical business volumes through organic growth or mergers and consolidation. It is also important to differentiate the value of takaful offerings by specialization, governance and quality.

Listen to the full interview with Ashar Nazim at

(By Iris Lai, Hong Kong bureau manager:


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Advisors Guide to Selling IUL