The most rapidly expanding sector of

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1 Emergence of bancatakaful worldwide Sohail Jaffer is Deputy CEO at FWU Global Takaful Solutions The most rapidly expanding sector of the worldwide bancassurance industry distributing insurance products via banks is bancatakaful. This applies the bancassurance model to takaful, a sharia-compliant mutual and cooperative system of reimbursement, where members contribute money into a pooling system in order to guarantee each other against loss or damage. Takaful provides an alternative to commercial insurance that is grounded in Islamic muamalat, observing the rules and regulations of sharia law. As such, takaful-based products are especially attractive to a global Muslim population of 1.6 billion that is predicted to expand 35 per cent to reach 2.2 billion by However, bancatakaful may have a much wider potential audience. In one of the fastest growing markets, Malaysia, an estimated 60 per cent of bancatakaful customers are non-muslims. The rise of bancatakaful Overall, takaful has recorded very impressive growth over the past decade. The global actuarial specialists and insurance consultants Milliman presented a report to the April 2013 World Takaful Conference in Dubai that showed global takaful family contributions rising at a compound annual growth rate (CAGR) of 32 per cent, with global family takaful gross contributions in 2011 estimated at $2.12 billion, a 16 per cent rise on the previous year. However, Milliman also cautioned that overall industry growth seemed to have slowed significantly during Even more startling has been the apparent shift in the global balance of power. Whereas an Ernst & Young study in 2009 identified the Gulf Cooperation Council (GCC) countries as the principal engines of growth, it now seems that the baton has been passed to South and South East Asia, which both showed CAGR rates significantly ahead of MENA. The Milliman report confirms E&Y s earlier finding that Malaysia dominates the family takaful landscape. In 2011, Malaysian providers wrote almost $1.2 billion of family contributions - some 56% of the global total. However, the 2011 slowdown in takaful growth may be due to Malaysian market saturation. Indonesia has taken over as global growth champions, with CAGR of 70 per cent. Nor is the growth of takaful-derived products confined to MENA or ASEAN countries. The UK, for example, has seen the emergence of a dedicated takaful motor insurance provider, Principle Insurance, focusing on the country s 1.6 million Muslims. Its marketing drive also seems to reveals a more profound truth; that takaful products can transcend their Islamic origins to find broader ethical markets. In

2 Global family takaful gross contribution USD millions Source: Company financials, industry reports, Milliman estimates Family takaful contributions by key regions USD millions South East Asia Middle East & Africa South Asia 33% 33% 33% ,375 1, Source: Company financials, industry reports, Milliman estimates

3 ... takaful products can transcend their Islamic origins to find broader ethical markets neighbouring France, too, recently enacted tax code changes actively encouraging the expansion of tancatakaful initiatives aimed at the country s five million Muslims. A recent report published by Oliver Wyman observes, Recent surveys suggest that given the choice, one in two Muslims would opt for Islamic finance alternatives. Pensions gap There is also opportunity to use takaful to solve the age-old problem of lack of Islamic pensions. It is possible to develop sharia-compliant private sector occupational plans and personal savings products for distribution via bank channels and corporate group schemes. Most takaful operators are already offering savings products where participant contributions are pooled in Islamic private savings funds and invested in sharia-compliant investments. The operator receives agency fees from the investment fund or a share in investment earnings. Participants receive lump sum payments upon withdrawal from the scheme. Milliman suggests a model for an Islamic occupational pension fund that creates accumulation and decumulation phases. The participants may invest the money with the takaful fund and opt for access by drawdown. Alternatively, the takaful company can promise a fixed or variable monthly income. Such schemes would essentially resemble voluntary long-term defined contribution plans, with longevity risks mitigated by strategies such as investing the wakeel or mudharib on behalf of individual contributors in long-term instruments such as infrastructure bonds. More clarity needed Yet in many countries with indigenous Muslim populations, such as Turkey, Egypt, Pakistan and Indonesia, the bancatakaful market remains embryonic. Even in the GCC, the most mature takaful market, there remains room for convergence and further regulation. Insurance rating specialists AM Best recently conducted an authoritative review of the bancatakaful industry and highlighted the degree to which the GCC member states differing regulatory regimes provide varying degrees of protection to policyholders in takaful companies. There are a few international financial centres in the Middle East including the Dubai International Financial Centre (DIFC) and Qatar Financial Centre (QFC), that have clear definitions, comprehensive provisions and specific takaful regulations that take into account the model s particular characteristics. In particular, provision of qard hasan interest-free loans in cases of policyholders fund needing to support the takaful fund is either included in regulation or made explicit in contract between the policyholder and the insurance provider. Where qard hasan obligations are statutory, the shareholders fund is also obliged to make such loans permanent. DIFC and UAE also make it explicit that policyholder liabilities rank senior to any other financial obligation. Bancatakaful in emerging markets The growth rates for bancatakaful compare favourably with those for Bancassurance generally in emerging markets. A recent working paper by Serap O Gonulal, Nick Goulder and Rodney Lester for The World Bank reveals

4 Table 1: Countries with and without takaful - specific regulations Country/Free Zone Takaful-specific Obligation to supply Permanent qard Policy priority regulations in place qard hasan hasan Bahrain Yes Yes Yes No provision Saudi Arabia No No No No provision Kuwait No No No Unclear Oman No No No Unclear Qatar No No No Unclear UAE Yes No No Most senior DIFC Yes Yes Yes Most senior Qatar FC Yes Yes Yes No provision Source: AM Best Takaful Review 2013 Table 2: Leading emerging bancassurance markets Country GDP per capita ($) M2/GDP growth (%) Branches per 100,000 adults Life share of bancassurance Non-life share of bancassurance Brazil 8, % 12% Chile 9, % 28% China 3, n.a. 48% n.a. Malaysia 6, % 7% Thailand 4, % 10% Morocco 2, % 3% India 1, % 35% Hungary 12, % n.a. Poland 11, % 4% Source: World Bank Development Indicators, IMF database, Axco Reports widely diverging growth rates. However, the report also identifies at least two features shared among emerging markets, including: Preponderance (until recently) of single-premium investment-linked contracts as alternatives to deposits (thus leading to considerable volatility in life bancassurance revenues) Bank dominance of consumer credit insurance and their generally low share of non-life markets. The Latin American and Maghreb countries have been influenced by historical links to the leading bancassurance markets (France, Portugal, and Spain), and the EU Accession countries have been influenced by the presence of Western European insurers. The development of Asian Bancassurance has tended to be more country specific, although the global insurers have had some influence, says the report. What non-life business is written tends, naturally enough, to be associated with lending, main-

5 ly in relation to Motor loans and mortgages. In some of the higher income markets, bancassurers are adopting sophisticated segmentation of their customer bases. This enables them to align better their marketing mixes (product, service level, point-of-sale environment) with income levels. A major challenge will be the move from high-volume low-margin single-premium Life products to regular premium savings contracts, says the World Bank. Bancatakaful advantages As more takaful companies offer a fuller range of retail family-oriented products into the market, they tend to find banks to be the best distribution channel. Bancatakaful (the Islamic equivalent of bancassurance) provides an attractive, cost effective, and increasingly prevalent way of selling takaful products. Banks have the opportunity to leverage their networks to distribute takaful and generate cross-selling opportunities by bundling are also well placed to achieve valuable economies of scale in marketing, IT and back-office processes, as well as generating sales leads via call centres, branch networks and personal bankers. The potential for those efficiency gains is especially strong in the more densely populated countries where Islamic finance is starting to take off. Again, urbanized France provides a powerful illustration of the potential that could be generated by banks extensive networks, targeting highly clustered Muslim communities. Waiting for the new wave Despite the obvious efficiencies gained via bancatakaful, some observers note that overall takaful delivery remains highly fragmented, even in markets where Islamic finance is well established. This seems to leave considerable headroom for further double-digit growth in the decade to come. Bancatakaful has received mixed reviews, with some products highly successful and others more problematic. Lack of success is usually attributable to factors such as lack of interest on the part of branch management, poorly designed promotions, lack of database integration and marketing and negative attitudes toward change and insurance generally. Bancatakaful has boosted annual global growth of takaful above 20 per cent, far outstripping the 2.5 per cent annual growth achieved by conventional insurance. However, the market has developed more slowly than many industry analysts predicted around 2005, suggesting that accelerated growth is still waiting for take-off in the next five to 10 years. Alpen Capital, for example, estimates total market income, last measured at 7.8 billion on 2011, will soar to $37 billion by This expected acceleration might be driven by digital distribution. As a previous E&Y report noted: There is considerable room for improvement in the levels of channel efficiency, personalization and integration that banks offer their customers. Above all, digital applications, such as mobile technologies and social media platforms, provide vital insight into the lifestyle needs of customers. They can also enhance service offering through convenience and efficiency at point of sale and using customer data to tailor segments to demands, monitoring sales, and more appropriate and targeted products. New products, increasing digital sophistication and maturing regulation all fit into a

6 Banks are responding by reconsidering self-manufacture in a drive to capture the entire value chain - or form joint ventures with platforms and insurers to share in manufacturing margins, they add. Source: PwC channel evolution model proposed by Price- WaterhouseCoopers (PwC). They say: We see leading international insurers devising successful strategies by using a structured process to integrate global, regional, and local perspectives. First, leading insurers analyse the market maturity of countries in their portfolio with an eye to gaining a basic understanding of the potential channel options for each country. Then, leading insurers analyse the local distribution forces to evolve the preliminary understandings from market maturity analysis into nuanced, localized strategies. PwC explains. The worldwide bancassurance market could certainly benefit from the new thinking and fresh energy that bancatakaful promises. In the most mature bancassurance market of all, the UK, the industry has been devastated by various miss-selling scandals and the fallout from what E&Y call The TCF (Treating Customers Fairly) Revolution that forces banks to act as agents of the customer, by charging customers separately for advice received. This paradigm shift in the market should theoretically be good for customers, but does make it challenging to meet shareholder expectations, in particular for those banks focused on the mass market, say E&Y in their latest bancassurance bulletin.