In the nearly four decades since inception, the Takaful sector continues to achieve strong global growth and is projected to reach USD 52.5 billion by 2020 up from USD 31 billion in 2012, according to the Dubai Centre for Islamic Banking and Finance (DCIBF). This growth trajectory demonstrates the huge untapped potential of the Takaful and Retakaful sectors, underpinned by strong demand from Muslims as well as non-Muslims seeking ethical financial services. But the double whammy of high claims and operating expenses have dampened industry profitability with returns on equity (ROEs) hovering between 1 and 3 percent.
During the 13th edition of the World Takaful Conference recently held in Dubai, we discussed three focus areas to drive profitable growth: sector expansion, differentiation, and technological innovation.
Sector growth must focus on deepening already strong local demand; the Gulf Cooperation Council (GCC) region dominates the global Takaful industry with 77.2 percent of the world’s Takaful Gross Written Contributions (GWP) in 2015, according to Milliman’s Global Takaful report 2017. But among the three billion people in MEASA (Middle East, Africa and South Asia), there are Muslim populations in Africa and India/Pakistan that are underserved and untapped with only USD 700 million and USD 500 million respectively in Gross Written contributions. Africa also requires over a USD 1 trillion of infrastructure investment, which is another opportunity for Takaful and Retakaful. The Industry must also support the growth of crucial adjacent sectors such as pensions where a 30% investment of these funds in an Islamic manner, will drive the growth of a US$120 billion Islamic pension fund industry in the region. Similarly, the industry requires a systemic increase in Islamic assets, without which the considerable liquidity from Islamic investors/clients cannot be managed.
The absence of globally recognisable Takaful names suggests the need for significant differentiation and brand development. The industry must clarify what makes Takaful and Retakaful so different from traditional insurance cover. While conventional and Takaful might have similar economic drivers, Takaful players must distinguish themselves and double down on their Islamic principles rather than try and mimic their conventional counterparts. They should in fact leverage the ethical differences and the spirit of mutuality they offer represented mainly by their risk-sharing model and Sharia’a compliant investments.
Furthermore, Takaful companies must support the Retakaful sector by placing more of their risks and reinforcing a virtuous cycle. Developing differentiated brands and supporting Retakaful will help create more scale and better pricing power. This is also an essential part of the Islamic element they promise to clients, which should be thoroughly and transparently implemented throughout their investment process. Lastly, more focus is needed on newer, specialized products where new segments are served and can be priced for value.
Last but not least, embracing innovation is absolute mandatory for this sector to remain competitive. One form of innovation is to explore new business models and partnerships such as bancassurance/white labelling tie-ups with Islamic Banks. Then of course is the universe of opportunities that FinTech and InsurTech present and should be harnessed to increase profits. For example, algorithms applied to client behavioural data can be used to identify new micro segments or products, and to effectively tailor and price these products for just about every different customer/occasion. The same analytical horsepower can be used to reassess and reprice risk and predict timing and scope of claims, thereby allowing players to change pricing or optimise service. Costs can be reduced significantly by digitising the enterprise across the board. In essence, the estimated 40–60 cents per dollar of excess cost in the Insurance value chain (likely higher in Takaful) can be significantly reduced to the benefit of customers, insurance companies and shareholders.
With more than 108 insurance-related entities based with the Centre and with a portfolio of over 29 Islamic financial institutions, DIFC is embracing disruption and change. We have created an environment conducive to innovative thought and creation.
We are promoting the innovation agenda, having established the first FinTech accelerator in the region, FinTech Hive at DIFC, which provides a platform for financial and technology firms to come together and bring cutting-edge technologies to the region. This is supported by the launch of an Innovative Testing License, introduced by the Dubai Financial Services Authority (DFSA) to allow qualifying FinTech firms to test and develop their concepts without being subject to the regulatory requirements that normally apply. The final element in this enabling trifecta is funding, which we have addressed with the creation of a USD 100 million FinTech fund to accelerate the development of financial technology by investing in start-ups from incubation through to growth stage.
Now is the time for the Takaful industry to harness this innovation and finally drive the profitable growth needed to support the considerable demand for Islamic finance globally. With a dedicated focus on InsurTech, Islamic FinTech and RegTech in the next FinTech Hive at DIFC accelerator programme, we are already witnessing a willingness from the sector to adopt new technologies. However, a real commitment to leverage innovation to grow and to differentiate is needed to jump start the industry. Unlike some conventional sectors that fear obsolescence in the face of innovation, the Takaful and Retakaful industries must embrace innovation as the only way to unlock their amazing potential.