TAKAFUL CONFERENCE ON ISLAMIC INVESTMENT MANAGEMENT 12 FEBRUARY 2008, DUBAI KEYNOTE ADDRESS Dr. Nasser Saidi Chief Economist, DIFCA It is indeed a pleasure and an honour for me to address participants at this Takaful Conference on Islamic Investment Management hosted by Middle East Insurance Review. The occasion of this forum is an excellent opportunity for regulators, industry practitioners and investors to discuss recent developments and key issues in Islamic finance, particularly on Takaful. It will also serve as an excellent platform in providing greater awareness of the innovative products and services available in the Takaful and re- Takaful market. The Islamic Finance industry is growing at an unprecedented rate. The Institute of Islamic Banking has projected that the Takaful market will reach $7.4 billion in premium by 2015. The potential for Takaful is enormous given the demographics and that insurance penetration in most Islamic countries is below 2% of the GDP. Worldwide insurance premiums amounted to USD 3,723 billion in 2006. This was split into USD 2,209 billion in life and USD 1,514 billion in non-life insurance. Total premium volume grew by 5%, in real terms, with life premiums increasing by 7.7% and non-life premiums by 1.5%. Profitability improved in both life and non-life insurance in 2006 compared to 2005. The macroeconomic environment during 2006 was characterised by solid economic growth and, in most geographical areas, moderate inflation, rising but still low interest rates and booming stock markets. The results for 2007 are likely to be more subdued. (SLIDES 1, 2, 3, 4, 5, 6) Insurance industry in the GCC 1
While the UAE continues to attract investment, both domestic and foreign into traditional sectors such as real estate and tourism, new knowledge-based sectors and financial services and in particular Islamic Finance are gaining in importance. Insurance companies made a late entry in the GCC region, mainly owing to Islamic beliefs, which prohibit insurance in its conventional format. However, some Middle East insurance companies were established with conventional business models, targeting oilderived wealth. Among the GCC countries, Kuwait was one of the earliest to witness the establishment of insurance companies, while companies in countries like Oman and Qatar were established as late as the 1980s and the 1990s. Kuwait Insurance Company, established in 1960 is one of the oldest in the GCC region. TAKAFUL INDUSTRY The past five years has seen a flourishing of Shari a compliant finance, with the industry growing at a rapid pace, with annual growth rates in excess of 15% p.a. In particular there has been a rapid growth in Shari a compliant banking and in finance, with the Sukuk market challenging the conventional bond market as epitomized in the 2006 Dubai Ports $3.5 billion Sukuk which received some $11.4bn in subscriptions, the largest-ever oversubscription for a Sukuk. Less known is the growth of the Islamic insurance and re-insurance sector, Takaful and re-takaful. As the Arabic name indicates, it is based on the principle of cooperative insurance and mutuality. The global Takaful market is expected to grow by some 15-20% per annum to reach the USD 7.4 billion mark in annual contributions by 2015. In the GCC, there are some 23 Takaful companies compared to 278 conventional insurance companies. However, the rapid growth comes from a low base, with the insurance industry, both conventional and Shari a compliant, being grossly underdeveloped in the Middle East North Africa region. 2
The underdevelopment of the insurance industry in MENA is attributable to a number of factors including barriers to entry, restricted market access and protection of local insurers. The near absence of competition, restrictions on entry of foreign insurers and the dominance of government owned insurers and regulatory control of insurance pricing and products has led to expensive insurance and an absence of new products and innovation. Other structural factors have had a negative impact including inadequate development of property rights, their protection and enforcement; inadequate development of housing and mortgage markets and a lack of modern, enabling legal and regulatory infrastructure. (SLIDE 7) REINSURANCE AND RE-TAKAFUL INDUSTRY In the Middle East, Takaful operations have developed, but Takaful penetration is still relatively low, compared to the total potential market. (SLIDE 8, 9, 10) Two thirds of the premiums reinsured from the region are with the reinsurance companies abroad. Re-insurers in the Middle East have the opportunity to establish their credentials and gradually move this business to themselves. This shift of the business from international companies to the region could be led by the Re-Takaful companies. Takaful companies are allowed to reinsure conventionally, only when there is not enough Re-Takaful capacity. Re-Takaful companies operating in the Middle East are in for a bright future as it is the largest Takaful market in the world. An organised Re-Takaful set up is more or less assured of the ceded Takaful business in the region. 3
DIFC AND THE INSURANCE INDUSTRY The MENA insurance industry is characterized by a "corporate governance gap", including concerns over the effectiveness of insurance supervision, divergent actuarial and accounting standards, capital adequacy and transparency, and technical solvency guidelines. Empirical evidence supports the presumption that good corporate governance leads to better performance and higher valuation of companies. Overwhelmingly, institutional investors are willing to pay a premium for the shares of a well governed company over one considered poorly governed but with a comparable financial records, with premiums averaging 30% in Eastern Europe and Africa and 22% in Asia and Latin America. Better corporate governance practices results in better corporate credit rating by banks and rating agencies, leading to improved access to and terms of credit. This means lower borrowing costs for well-governed companies. Hawkamah, the regional Institute for Corporate Governance based in the DIFC, has jointly with the Arab Forum of Insurance Regulatory Commissions (AFIRC) established a Task Force on Corporate Governance of the Insurance and Re-Insurance Industry in the region. The ultimate goal of this task force is to undertake a corporate governance assessment of the insurance sector in participating Arab countries; develop an insurance corporate governance policy brief to include conventional insurance and Takaful ; develop corporate governance guidelines for the insurance sector; and build the corporate governance capacity of the industry. (SLIDES 15, 16,17) The recommendations of the Task Force will take into account the guidelines laid down by the OECD and The International Association of Insurance Supervisors (IAIS) for corporate governance and the IFSB s Guiding Principles of prudential requirements in the area of corporate governance for institutions offering only Islamic financial services. (SLIDES 11,12,13,14) 4
DIFC and Islamic Finance The DIFC has been active setting up the legal and regulatory infrastructure to support the development of a sustainable Islamic finance industry. DIFC has developed a modern model law to regulate the Islamic finance sector, with special licensing category for firms carrying out Islamic Finance. The DIFC legal framework regulating the Islamic finance business includes a number of Rule Books issued by the Dubai Financial Services Authority, the DIFC s sole, integrated regulator. 1 The DIFC Islamic finance infrastructure also includes a DIFC Shari a Centre. During 2008 we aim to roll out an Islamic Finance Portal, and a Commodity Murabaha Exchange. To help build capacity, the DIFC launched in March 2007, the world's first Executive MBA specialized in Islamic Finance and Energy delivered by Cass Business School. On the investment side, DIFC has taken the lead to establish WAQF, which is the first ever Islamic Trust Service provider in the world jointly established by DIFC Investments and Dubai Islamic Bank, which offers Shari a compliant trust services; and an Islamic Hedge Funds Platform. Developing Islamic Financial markets is a strategic priority for the DIFC and the DIFX is now the world s largest exchange for Sukuks with total value reaching USD 17 billion, or some 41% of the value of all listed Sukuks worldwide. Similarly, the DIFC s developmental plans for the insurance sector aim to create a hub for all types of wholesale insurance players and include fostering the development of Re- Takaful capacity, focusing on creating an attractive captive domicile, establishing an 1 These include the Islamic Finance Module, the Offered Securities Rules and the Collective Investment Schemes. There is a separate DFSA Rule Book containing the Prudential Insurance Business Module which covers Risk Management, Capital Adequacy, Measurement of Asset and Liabilities of Insurers, Financial Reporting, Actuaries and Consolidated Supervision requirements for the Insurance Industry players. 5
Insurance Education Center, setting up an Insurance underwriting centre/back office operations center, launching an insurance/data research center and creating a sophisticated risk management industry. The Promise of Takaful We at DIFC see the financial sector as an engine of growth over the next decade as the region develops its financial markets, innovates and effectively manages and controls its natural and financial wealth. The prospective growth of the Takaful business in the coming years is promising. Demand is growing as a result of strong demographics, sustained economic growth and the increase in public awareness of Takaful products, coupled with more efficient and diversified distribution channels that will provide greater access to a larger segment of the population. The Takaful sector has emerged as an important component of the financial system and has successfully integrated with the other components of the Islamic financial sector. The challenge will be to develop an enabling environment through the provision of a legal, regulatory, and supervisory and Shari a framework to support the sound and efficient growth and development of the industry. Product innovation, competitive pricing compared to conventional insurance products and excellent customer service will remain key enablers for future growth of the industry. Enhanced capacity and the availability of resources, particularly human capital, are essential in expediting the pace of progress in these efforts. For the regulators, the challenge lies in providing an enabling environment for removing the barriers to entry and competition, facilitating product innovation while at the same time, ensuring that good risk management principles and procedures are in place. 6