Whether you know about Takaful insurance or not, what are the current stakes of this $44 billion market?
For a long time, insurance penetration in Muslim countries remained very low, for economic as well as religious reasons. As a matter of fact, Muslim society has had a negative perception of traditional insurance because it contains elements that go against Islamic law (Charia). However, Muslim countries also needed to protect themselves against the various risks that characterise modern life. That’s how Takaful insurance saw the light of day!
The first Islamic insurance company in the world, Islamic Insurance Company (IIC), was established in Sudan in 1979. The market is segmented as life/family takaful and general takaful, which currently dominates the market. Major international insurers have entered the Takaful industry in recent years, but Allianz is the only international insurer among the leading players operating in the market.
In 2006, while the Takaful insurance market represented $2.5 billion, the projected turnover for 2015 was $7.5 billion, with an estimated annual growth of 13%. But by 2010, the market had already reached 8.5 billion. Today, the global takaful market is worth $21 Billion and is projected to reach $44 billion by 2024.
The growth of the global market is mainly driven by the three main markets of Saudi Arabia, Iran and Malaysia, which account for nearly 80% of total global assets. Globally, there are an estimated 324 Takaful operators in the world. The global assets of Takaful operators reached $46 billion in 2017 and are expected to reach $72 billion by 2023.
What is it made of ?
All parties or policyholders in a takaful arrangement agree to guarantee each other and make contributions to a pool or mutual fund instead of paying premiums. The pool of collected contributions creates the takaful fund. Each participant’s contribution is based on the type of coverage they require and their personal circumstances. Takaful policies cover health, life, and general insurance needs.
Takaful insurance is based on three fundamental prohibitions in Islam: gambling, interest and uncertainty.
- In order to exclude any notion of gambling or uncertainty in their contracts, companies therefore resort to “tabarru”: a contract “free of charge”. In concrete terms, this means that subscribers pay a “donation”, not a premium, to the operator.
- In order to exclude any notion of interest, the amount of this “donation” only covers the management costs of the contract; any profits must be shared between the policyholders and the operator. That means that any claims made by participants are paid out of the takaful fund and any remaining surpluses, after making provisions for the likely cost of future claims and other reserves, belong to the participants in the fund—not the takaful operator. Those funds may be distributed to the participants as cash dividends or distributions, or via a reduction in future contributions.
- Furthermore, it is forbidden to invest the funds in a number of precisely defined sectors, known as “haram” or illegal: alcohol, drugs, gambling, pornography, non-halal food, tobacco, non-Takaful banks and insurance, and the weapon industry, except for the state-owned industry.
Takaful & IFRS 17: a brain teaser
The implementation of IFRS 17 raises significant uncertainties for Takaful companies regarding its interpretation and application to their business. The project of implementing the first international and comprehensive accounting standard for insurance contracts is largely developed based on conventional insurance structures and is therefore not adapted to Takaful organizations.
Some actors even argue that the accounting standard may not be applicable to Takaful companies given that Takaful does not represent a transfer of risk from the policyholder to the company, but instead a pooling of risk shared by the participants.
Since IFRS 17 was not set with Takaful in mind, a lot of the Takaful specific features were not considered within the standard. The main challenge for its implementation will regard the following topics:
- The selection of measurement models (as the nature of Takaful insurance is so peculiar, it is necessary that they determine whether they qualify for the VFA model, and this process is not straightforward.),
- The treatment of various funds in Takaful (in certain jurisdictions, Takaful companies are required to provide separated disclosures by fund and it is unclear if they will have to keep doing it for IFRS 17),
- The fulfilment of cashflows and CSM (will Takaful companies have to calculate fulfilment cashflows and CSM at a fund level?),
- The treatment of surplus sharing (it is unclear whether treatment of surplus sharing should reflect statutory reserving and capital requirements or accounting requirements).
When the application of IFRS 17 to traditional insurance companies represents such a challenge, the most appropriate approach to answer these considerations for Takaful insurance remains highly debatable and will most likely be the subject of many discussions until 2022.
Overall, insurance companies should keep an eye on Takaful since, according to Ezzedine Ghlamallah, consultant and co-founder of SAAFI, “the Takaful industry […] should no longer be considered as a niche product, but as an alternative that has proven its legitimacy.”
Want to know more about Takaful ? Here’s a great master paper about Takaful in Belgium suggested by one of our reader.