By DAN REYNOLDS, senior editor of Risk & Insurance®
At first glance, the news from A.M. Best is that the Middle East is a ripe market for the insurance industry.
Increasing oil prices and expanding government spending on infrastructure are drivers on the commercial side. An expanding middle class and governmental mandates in some Middle Eastern countries for auto and healthcare coverage are creating demand in the personal lines.
According to the 2010 Gulf Region Market Review, a report issued by the ratings agency in November using data from Swiss Re, the United Arab Emirates and Saudi Arabia showed an annualized premium growth rate of more than 20 percent between 2002 and 2009.
And takaful, the insurance concept based on Muslim law, is in concept at least intriguing. In its purest form, takaful is a cooperative arrangement that adheres to the Islamic principle of Al Takaful, or "bear ye one another's burden."
Takaful companies may not invest in businesses, for example, that make money from gambling or the consumption of alcohol, both of which violate the precepts of Sharia. In their purest forms, takaful companies see the policyholder and the insurer sharing surpluses and investment profits.
The pricing of takaful insurance is impacted by these religious restrictions on investments. With a narrower field of investments available to the insurer, the pricing of premiums is going to be higher for both personal lines and commercial lines. It's sort of like the choice faced by the consumer looking for organic produce: You can find it, but you're going to pay more for it.
In number, takaful companies are increasing rapidly, according to A.M. Best, which counts 100 formed since the first one was created in Sudan in 1979. Takaful "windows"--that is, takaful subsidiaries of conventional insurance companies--are also on the upswing, according to the ratings agency.
But with that as a starting point, getting a more detailed grip on the takaful market is difficult, according to Carlos Wong-Fupuy, a London-based managing senior analyst with Best.
"One of the issues with takaful is that there is no consensus on what takaful is," Wong-Fupuy said during an interview with Risk & Insurance® on Nov. 29. As Wong-Fupuy points out, takaful is more than having Sharia-compliant investments.
Takaful firms are also supposed to feature separate policyholder and shareholder funds and include equitable pricing and distribution of proceeds. The takaful companies analyzed by A.M. Best display a very wide variation in how those concepts are treated, Wong-Fupuy said.
Some Middle Eastern companies are clearer in their regulations about what they will accept in insurance companies and how those companies intersect with Islamic law. Bahrain, a small Gulf country located between Saudi Arabia and Qatar, lists specifics about takaful companies in its regulations and doesn't allow takaful "window" operations with conventional insurers, for example.
One thing Wong-Fupuy is sure of, despite what their backers may call them, takaful companies are not mutuals. Mutuals, at least in the European model, have their origins in groups of policyholders with like interests banding together to protect those interests. Takaful companies are a different animal, according to Wong-Fupuy.
"In terms of governance, there is no affinity group. Policyholders are not represented in the governance of the organization," Wong-Fupuy said.
So, as vibrant as the potential market is in the Middle East, the area has a long way to go in defining what is acceptable and unacceptable under Islamic law and in how profitable these insurance operations are likely to be.
November 30, 2010
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