Retakaful or Islamic reinsurance plays an important role in managing and mitigating risks in Islamic finance. An integral component to the continued development and growth of the takaful industry, retakaful serves as an effective tool to spread portfolio risk over different takaful pools and provides underwriting capacity that would enable takaful operators to cede larger risks.
The retakaful industry has grown leaps and bounds in recent years. Until few years ago, the lack of adequate Shariah-compliant capacity was a major constraint. Now the growing capacity of retakaful operators has fuelled the strong growth of the takaful industry.

The strong performance of the global takaful industry bodes well to the expansion of retakaful. In the last 5 years, the takaful industry has recorded a remarkable double digit growth of more than 30% per annum. This is a stark contrast to the average of between 5-10% growth of the conventional insurance industry. According to the Ernst & Young Global Takaful Report 2011, global takaful contributions are expected to reach US$25 billion in 2015 from US$9.15 billion recorded in 2010 given that the current growth trajectory is maintained.

The industry is seeing a significant increase in market share in key markets of MENA and Southeast Asia whose booming economies are driving the demand for infrastructure and property development as well as investment on a huge scale. This development has stimulated the growth of takaful and retakaful industry. Increasing awareness, demographic factors and improvements in the quality of products and services offered are also important factors responsible for the growth of takaful.

The GCC remains by far the most important contributor whereby 70% of total global takaful contribution comes from this region. Within GCC, Saudi Arabia has the largest takaful market, contributing US$4.3 billion of 51.8% of the total industry contribution. The second largest contribution at 21% emanates from Southeast Asia. In terms of numbers, the GCC accounts for the largest number of takaful operators at 77. This is followed by the Far East at 40 and Africa at 32.

But by 2015, the geographical concentration in terms of global contribution is expected to shift from the GCC to the Asia Pacific region. This shift is mainly contributed to the future growth markets of populous economies of Indonesia as well as the Indian subcontinent. Ernst & Young reported that the Indian subcontinent is now the fastest growing takaful market after recording an impressive 85% growth in contributions. In the Southeast Asia region, Malaysia maintains its dominant position with total takaful contributions at US$1.58 billion and charting an average growth rate of 24%.

At present, the size of the takaful industry is at best insignificant in comparison with the conventional insurance industry. The takaful market is a mere 1% of the global insurance market. However, the industry is poised for tremendous growth opportunities that are yet to be fully tapped. In recent years, a number of large reinsurance companies have expanded their business operations into the retakaful market in order to participate in the significant growth of the takaful market. The growing number of retakaful players emerging in the market has helped to increase the capacities of takaful operators. In line with the continuing expansion of the takaful business, the demand for retakaful is expected to expand between 15% and 20% on an annual basis, he observed.

However, leakage to the conventional resinurance market has posed a major constraint on the growth of retakaful. Several factors for this leakage includes risk appetite, pricing, ratings, and long standing relationships with reinsurers; rather than lack of retakaful capacity. Until several years ago, takaful companies were dictated by the lack of or limited retakaful capacity to cover all the direct takaful needs. The issue of retakaful capacity has begun to ease recently with the influx of new retakaful companies entering the market in response to the market demands. Furthermore, the entry of global reinsurers such as Munich Re and Swiss Re into the market means that there is now ample of “A” rated retakaful companies to choose from to underwrite bigger and specialised risks.

Despite this development, majority of the business ceded from takaful operators is still going to the reinsurers rather than retakaful operators. Evidence from various sources suggests that leakage to the reinsurance market is still common and significant. It ranges from as low as 30% to as high as 70%. Statistics released by Bank Negara Malaysia showed that leakage to the conventional reinsurers in Malaysia hovered around 70% of total contributions. The effort by Bank Negara Malaysia in tackling this issue through the issuance of the Guidelines on Takaful Operational Framework signifies the regulator’s supporting role to the orderly development of the takaful and retakaful industry. Under the Framework, the takaful operators are required to cede to retakaful unless there is no cover available.

Another challenge for the retakaful industry is a lack of specialised expertise and shortage of actuaries with the necessary Shari’a knowledge as well as strong leadership at the helm of the retakaful company. The industry needs adequate supply of experts and leaders to drive innovation and sustain competition. The shortage of talent pool with the requisite expertise is a significant business risk for takaful and retakaful companies, particularly competent underwriters, actuaries and claims managers.

The industry is also grappling with the lack of globally accepted standards. Lack of standardization can potentially hinder the industry from reaching its full potential of growth and development. This includes different operational models, accounting standards and varying Shari’a interpretations. In recent years, Bahrain, Malaysia and Pakistan have introduced specific laws and regulations governing the takaful industry in their respective countries. However, variances in standards and regulatory regimes across jurisdictions have served as a double-edge sword for takaful and retakaful companies, which ultimately hinders cross border development and investments. While these regulations are positive development for the industry, an industry-wide clarity in areas such as governance, transparency, risk sharing and risk transfer are in dire need of attention.

Within the takaful market, family takaful is emerging as a fast growing segment of the industry. The Milliman Global Family Takaful Report 2011 estimated that global family takaful contributions stood at US$1.7 billion in 2010, accounting for 20% of total global takaful gross written premiums. The Southeast Asian market dominates the lion’s share of the business at 73%, followed by the Middle East and Africa at 25%. The report also projected a 250% growth in family takaful to US$4.3 billion in the next five years. The growth of the family takaful business is expected to continue on a steady path in tandem with the increasing life insurance penetration rates in both nascent and mature takaful markets. The family takaful segment, according to him, remains underpenetrated as it contributes only 5% to the takaful business in the MENA region whilst Malaysia has a higher penetration rate of 77%. Business opportunities in the investment-linked class are substantial prompted by rising income, growing young population and middle class and growing awareness among Muslims of the multiple benefits of life insurance. Family takaful business has also benefitted from the compulsory health insurance policies in Saudi Arabia and the UAE. But the ability of takaful and retakaful operators to increase insurance penetration is critical to the industry’s sustainable growth and performance.

Although the retakaful industry is considered small on a global basis compared to the conventional reinsurance, it certainly has future growth potential. Takaful already has a firm footing in Southeast Asia and the GCC countries whilst North Africa is expected to emerge as a new important takaful market in the next five years.

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