RetakafulAs with conventional insurance, the takaful pool needs to be able to redistribute some ofthe risk outside the pool if it is to remain viable and sustainable. Otherwise,very large claims resulting from catastrophic events (such as heavy storms orflooding) could cause the pool to become insolvent. Consequently, retakaful has developed in a similar way to reinsurance.The takaful poolredistributes some of the risk in the pool by passing a portion of thecontributions in the takaful pool to the retakaful pool. The retakaful poolworks on the same principles as takaful:the members of the retakaful pool (other takaful pools/funds) make contributions into the pool tomutually guarantee each other. The participants in a retakaful contract are the takafuloperators, acting on behalf of the respective takaful pools they represent.

 THE FUTURE OF THE TAKAFUL INDUSTRYA report by Ernst & Young in 20131 commentedthat ‘there is a dearth of takaful operatorswho are capable of providing leadership to the growing internationalisation ofthe industry. There is a need for large, regional champions to lead growth inregional markets and to participate in international markets’.There are signs of change. In this 2013 publication,Ernst & Young reported that global gross takafulcontributions are estimated to be around $15 billionin 2014, growing at more than 15 per cent per annum.Momentum seems to be building in takaful’s three key markets – Saudi Arabia, Malaysia and UAE.Saudi Arabia accounts for approximately half of the Islamic insurance industry,partly due to the fact that conventional proprietary insurance is not permittedin the country. The growth lever for strong growth in Saudi Arabia and UAE(specifically Abu Dhabi) was the implementation of the compulsory national healthinsurance policy.

Qatar is also legislating to make it mandatory to hold anational health insurance policy, which will drive demand of its takaful industry. Malaysia, with a relatively developedIslamic finance industry, has actively supported the growth of its takaful sector. In fact, Malaysia has emerged as theworld’s largest family takaful market. With a proven model and regulatoryclarity, the country is set to further build on this leadership position.Family and medical takaful are the major business lines across all markets.

Scale in the protection space is very important andthis has been a challenge outside of Saudi Arabia and Malaysia. Regulatoryenhancements are also presenting new opportunities in rapid growth markets suchas Turkey and Indonesia. The challenge is to build on the lessons learned fromcore Islamic finance markets to address rising demand expeditiously.CONCLUSIONTakaful is in many ways the ‘sleeping giant’ of theIslamic finance industry. As highlighted at the beginning of this chapter,protection against the risks we face as human beings is a basic need.

With thesignificant and growing Muslim demographic across the world, a tremendousopportunity exists to provide sharia-compliantprotection solutions. Conventional insurance still dominates across the Muslimworld (in a report by Swiss Re in 2011, 83.1 per cent of premiums went toconventional insurance providers in Muslim countries2)and in most of the non-Muslim world there is very little provision of takaful.For the takaful industryto compete with conventional proprietary insurance, it needs to achieve scale,a more accessible regulatory framework, have suitable long-term investments forthe family/life takaful market and attain operational efficiency.

Scaleis important to overcome significant start-up costs, provide competitivepricing and mitigate the risk of insolvency. Regulation in individualjurisdictions and the regulatory framework across borders need to be simplifiedto allow larger, regional players to develop. A lack of relatively stable,long-term sharia-compliant investments has been an issue – these areneeded to match the long-term nature of family/life takaful plans and the fact that these plans have astrong investment focus. Instruments such as longer-term sukuk arerequired to support the growth of the takaful industry.World-class standards of operational efficiency are required to competeeffectively with the well-established conventional insurance market.