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The idea of co-operative risk sharing is the oldest form of insurance. The same idea is behind Takaful, the insurance compliant with Islamic beliefs.
Though the Takaful industry is small compared to the global insurance sector, its influence and importance far exceeds its current size.
Within the GCC, the increasingly rapid economic development and the current low insurance penetration rates within the countries provide the basis for the growth of Takaful.
In 2006, the global Takaful industry was put at between $1.7 billion and $2.3 billion with Asia accounting for 53 per cent of the business, the Middle East 46 per cent and Europe and America a mere one per cent.
With the global Takaful contributions set to grow at a double-digit rate, the industry is likely to take off in Europe and America in the years to come. Thus growth within the region and elsewhere could push the total market size to $14 billion by 2015.
Also in the GCC the opportunities for increased uptake of Takaful insurance are positive. Takaful could also be the key to increasing insurance awareness and delivering on customer expectations, capitalising on the positive economic dynamics of the region.
However, the success of the industry depends a lot on the ongoing efforts and commitments initiated by various Takaful firms to develop a viable and transparent market place, whereby consumers are able to judge effectively the value provided by Takaful as compared to conventional insurance.
The Takaful market faces some unusual challenges. It has to match the service quality of the traditional insurance market and persuade an uninsured market to use the facilities of the Takaful market.
Although the Takaful division is operated as a wholly Sharia-compliant unit, it is fully complementary to the non-compliant business.
At the same time, Takaful operators are currently suffering from a lack of economies of scale and an inability to more effectively diversify their risks. Hence, the management fees and contributions charged appear high in light of the true costs incurred by the operator.
But, the biggest challenge for Takaful is in formulating a transparent, legal and regulatory framework for its operations. Regulatory mechanism in isolation will not help. It should be backed by solid legal framework. Given the operational differences between Takaful firms, such as the usage of different Takaful models, a deeper assessment of the protection offered to participants is required.
Insurance is a key indicator of a country's robust economy and the strength of its financial services sector. But according to a study conducted by Booz Allen Hamilton and the World Economic Forum (WEF), the level of insurance penetration in the Middle East and North Africa (Mena) region remains low.
Countries such as Bahrain and Jordan have well-developed regulatory frameworks that comply with Association of Insurance Supervisors (IAIS) standards and those of other international organisations. Other countries, however, lag behind.
The study advises policymakers to establish and empower a supervisory body in their country to enforce insurance legislation if such an organisation does not already exist. The study also recommends ensuring the independence of this regulatory body and upgrading its supervisory capacity in accordance with IAIS guidelines.
Cultural and religious reasons are commonly cited for the underdevelopment of insurance markets in the GCC.
Takaful could be the key to increasing insurance awareness and delivering on customer expectations, capitalising on the positive economic dynamics of the region.
The GCC Takaful market is currently growing at about 40 per cent per year.
Even with the best products and service, future development will be constrained without the creation of demand and an increased awareness of the need for insurance. The onus still remains on the Takaful operators to emphasise the broad appeal of Islamic insurance. In fact, Takaful can be marketed as the 'ethical' alternative to insurance contracts due to its rigorous screening of investments.
