Issue 857, 10 July 2009

Takaful companies need access to sovereign sukuk to aid growth

While it has so far been generally judged a success story, the takaful (Islamic insurance) market’s penetration rates remain low worldwide, and for it to continue growing more needs to be done.

There is no doubt that the takaful industry has witnessed significant growth over the last few years. According to Ernst & Young’s 2009 World Takaful Report, contributions rose from $1.4bn in 2004 to $3.4bn in 2007 and are forecast to rise to $8bn by 2012. There is some disagreement over the accuracy of these figures: Salah Malaikah, chief executive of the world’s largest takaful operator in terms of market capitalisation, Dubai’s Islamic Arab Insurance Company (Salama), thinks contributions are closer to $8bn today. But by all accounts the industry is growing rapidly, by as much as 20%/yr over the last decade. However, market players say a number of challenges remain, including facilitating takaful companies’ access to sovereign sukuk, developing the retakaful (reinsurance) market, and in the case of the UK’s only takaful operator, Principle Holdings’ Salaam Insurance, gaining market recognition and acceptance.

Allianz Takaful’s chief executive Abdulrahman Tolefat told the 1 July Takaful Summit in London that, with regards to asset management, Islamic insurance companies were limited in their investment options. They faced two major issues: firstly, “almost all takaful companies are invested in deposits [of Islamic investment bank accounts], and this will not give the same returns compared to conventional companies invested in treasury bills,” the Bahrain-based executive said. “One of the ideas is to establish highly rated sukuk funds… some governments issue short-term sukuk, but in my opinion this is not suitable for the takaful company to invest,” Tolefat said, explaining that these do not allow operators to match their long-term liabilities.

The second major problem is getting access to sukuk. “We don’t have access from the primary markets, and if we want to go to the secondary market the price is very high,” Tolefat said. “In the last sukuk issue for the Bahrain government [Central Bank of Bahrain’s $750m issuance], for example, we wanted an allotment, but we got nothing, because there is no priority given for the takaful companies.” Discussions with government bodies are ongoing, but the shortage of highly-rated sovereign sukuk with tenures of 20-30 years is a serious constraint. Despite these hurdles, Allianz is working with banks to launch its first Islamic annuity product over the next year to meet demand from clients looking to add to their state pensions.

Missed opportunity in the UK

The decision by the UK government to postpone the issuance of a sovereign sukuk in November 2008 was a setback for the industry. Former Lord Mayor of London and senior partner at law firm Norton Rose Sir David Lewis told conference delegates that his message to the British government is that “they should review what, in my view, was its wrong decision not to issue a sovereign sterling sukuk. If they were to do so and the technicalities worked out this would help considerably not only with the primary market but also the secondary market.”

Market players canvassed by GSN thought a sukuk issuance would not happen before the next general election in 2010, and in the likely event that the Conservative Party is elected it will then be down to the incoming government to issue a sukuk. Camberford Law chairman Lord Mohammed Sheikh, who sits on the Conservatives benches in the House of Lords, is seen as a key figure in the industry’s lobbying efforts with the expected new government.

Lewis’ second message was to Lloyd’s of London, the city’s leading insurance underwriter. “It is also important that Lloyd’s authorises a takaful or retakaful syndicate soon – they’ve received a lot of offers and are willing to work on viable propositions. However, they view this as a long-term development, which in my mind is a pity… Lloyd’s should work with a short-term timetable to authorise a syndicate.” Lloyd’s is said to be researching the viability of a £50m-200m retakaful syndicate with other parties, mainly financial institutions, to be operational next year (GSN 856/28).

Meanwhile, Principle Holdings’ chief executive Bradley Brandon-Cross told GSN his company was lobbying for a sovereign sukuk because “one of our challenges is we have to invest in sterling-denominated sharia-compliant assets. Although there is a big market for sharia compliant investments, the amount of that in sterling is quite small and so a government sukuk would be very important to us because we could invest in it.” Another challenge cited by Brandon-Cross was that the company hadn’t “achieved in the UK the cross-over point, where people view this as being an Islamic product – at this point it is still viewed as yet another insurer that might talk about being Islamic.”

Principle was formed in 2006 with a market capitalisation of £63m. All its shareholders, except one from Malaysia, are from the GCC region, mainly Saudi Arabia’s Al-Jomaih Group. It launched motor takaful in July 2008, and home takaful in April 2009. Over the next year it plans to launch commercial small and medium-sized enterprise takaful, a family offering and takaful marketed to non-Muslims. Principle has completed 750,000 quotes since its launch of motor takaful last year. Since December call centre conversions have gone above 25% – considered an industry average – and for web conversion it is hitting an average 5%-6%. The company made a loss in 2008 and plans do so in 2009-10.

Brandon-Cross told GSN that break-even was expected in 2011. But he warned that more needed to be done to raise awareness and understanding of takaful. “Market players have got to do more, community leaders need to do more, imams need to do more, because if we don’t the industry will fail and that will be a lost opportunity not just in this country, but also in Europe.” Principle’s experiences show that even if France is successful in issuing its first sovereign sukuk this year, and licenses a takaful company, it may be a while before Paris takes over London’s lead in Europe.