Lines of Business
Business lines in takaful are simila
of takaful sold worldwide is fam
by auto, property, marine, and av
products are also available.
“In the Middle East, for example, the people and regulators
are trying to enhance this industry because people would like
to buy halal products, which they didn’t have in the past,” Kar-
ray says. “There is a bigger demand for takaful, especially on
the personal line.”
Malaysian firms tend to write with greater leverage than
firms in the Gulf Arab states. The gross premium/equity ratio
in Malaysia has approached 250 percent in recent years, with
ratios in the Gulf states closer to 150 percent. When the cost
of increased retakaful rates for Gulf state business is added, it
becomes much harder for Gulf takaful operators to make in-
vestment income. Proposed Malaysian risk-based capital rules,
however, may reduce the leverage that takaful operators cur-
rently enjoy there.
The diversity of investments also varies from country to
country. In the Gulf states, for instance, takaful operators in
recent years have invested approximately 40 percent in equities, 30 percent in mostly short-term deposits (less than three
months), 20 percent in sukuks (the Islamic equivalent of bonds),
and 10 percent in real estate. (It’s important to note that investment in sukuks can be challenging because these are mostly
buy-and-hold investments without a liquid secondary market.)
Malaysian takaful firms, by contrast, have invested approximately 45 percent in sukuks, 30 percent in equities, 20 percent
in both long-term and short-term deposits, and about 5 percent
in real estate.
Investment results in Arab states in the Gulf have been far
more volatile than in Malaysia. Malaysian takaful operators historically have had better combined ratios by 20 or more points.
Worldwide, takaful insurer expenses have been in the 40 percent range.
Risky Business
While there’s little or nothing to stop conventional investors
from investing in Islamic finance—and many do—there are risks
involved, including:
■ ■ A dearth of experienced personnel to run takaful operations
(particularly in the areas of life insurance, risk management,
and sharia compliance);
■ ■ Money chasing the same investments;
■ ■ More limited flexibility compared to conventional insurance
operations;
■ ■ Portfolio vulnerability because of the high exposure to
■ ■ Fierce competition stoked by low barriers to entry in many
countries, which can result in underpriced risks;
■ ■ An inconsistent regulatory climate;
■ ■ A lack of experience in underwriting discipline and claims
servicing.
To date, efforts to standardize takaful management have
been limited, says Vizcaíno. “One area that is yet to be explored
is that of a clearinghouse, which would put in place a global
platform for takaful operators to trade/exchange takaful
exposure, therefore improving market risk management and the
overall liquidity of products,” Vizcaíno says.
The lack of common standards between regions remains a
challenge, admits Caryn Ho Wai Yin, senior vice president of
debt capital markets at RHB Investment Bank Bhd in Kuala
Lumpur. “Most Islamic products issued in Malaysia aren’t re-
ally acceptable in the Middle East, and you have to tailor your
products to meet their requirements.”
Yet a growing number of international insurance writers
have expressed interest in establishing takaful-only compa-
nies, and recent startups have targeted business in Malaysia,
the United Arab Emirates, Turkey, Singapore, Indonesia, Bru-
nei, China, Tunisia, Kenya, Egypt, and Abu Dhabi.
The cost? For a $30 million investment, you can start a
takaful firm in Malaysia or in the United Arab Emirates. It’s much
less in other jurisdictions, approximately $10 million to $15 million, for instance, in Bahrain and Qatar.
“The next decade will be a decade where there’ll be more
Islamic-structured products and investments,” predicts Rafe
Haneef, chief executive officer of HSBC Amanah, the Islamic
unit of Europe’s largest bank.
“It is clear that future growth in personal lines insurance in
the Islamic world will be largely driven by takaful business,”
agrees Underwood. “With the advent of obligatory insurance
(such as for motor liability), individuals have begun to consider
the purchase of insurance as a financial option.” As dispos-
able income in Muslim countries rises, Underwood continues,
“there is more interest in things like life insurance and personal
property insurance.”
“Takaful represents one of the most clear and robust repre-
sentations of Islamic finance, and this is reflected in the stable
growth rates it has exhibited in multiple countries,” agrees
Vizcaíno. Arguing that takaful is one of the biggest drivers of
