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Takaful insurance has seen huge gains in recent years, going from an afterthought in several markets to big business.
Takaful is the Islamic concept of lending money without interest. Its rise will mean different things for the industry, such as A) what will happen to the investment portfolios of Takaful companies?, B) what is the health of the markets where Takaful companies make up a growing proportion of the sector, and C) what will global insurers and asset managers that work with these Takaful companies need to know?
Takaful insurance has grown and is now apparent in many markets – often in the Middle East and Southeast Asia – which are also areas where the insurance compound annual growth rate is high.
The drivers of this growth, said Jessica Botelho-Young, Associate Director, Analytics, AM Best, may be the establishment of new well-rated Takaful insurers (for example, Orient Takaful) in markets such as the UAE, Bahrain, and Egypt. “Strong credit ratings may allow these takaful players to attract new business, particularly on larger, corporate risks where strong credit ratings are preferred,” she said.
For example, in recent months, Takaful contributions in Egypt jumped by 56.4% during Q1 2024 to reach EGP2.8 billion ($747 million), compared to EGP1.8 billion during the corresponding period in 2023, according to a report released by the country’s regulator, the Financial Regulatory Authority (FRA).
"There is an opportunity to expand the developmental benefits of insurance and risk transfer solutions in the Arab region.”
While on the other side of the world, two insurers said they are planning to start marketing the Philippines' first takaful products in the next 12 months, the country’s Insurance Commission boss has said. Insurance Commissioner Reynaldo Regalado told BusinessWorld in May 2024 that a pilot initiative involving Takaful was revised from the initial plan to offer it by Q1 2024.
On top of this, Takaful investment could become a major force in the coming years, especially in human development programmes. In recent months, the United Nations Development Program (UNDP) has lauded Takaful programmes as a way of combatting poverty and alleviating climate change-related hardship. “Climate change is escalating risks in the Arab States region, and Egypt is no exception,” said a March report from the UNDP titled ‘Financial resilience in Egypt, and the Arab States region’.
“From extreme weather, water scarcity, and coastal erosion to agriculture losses and disease outbreaks, these interconnected risks are jeopardising economies, infrastructure, community health, and overall social cohesion,” it said. “There is an opportunity to expand the developmental benefits of insurance and risk transfer solutions in the Arab region.” The UNDP added that Algeria, Jordan, and Egypt were among countries with populations facing growing risks, and where “Takaful [was] being explored as a strategic avenue for enhancing financial protection for vulnerable communities”.
Takaful has also become more joined with professional organisations in recent years. A joint UNDP, ISDB, and ISDBI report launched at COP28, “Insuring a Sustainable Future: Building Climate Resilience Through Takaful”, explored Takaful’s potential as an inclusive tool to enhance developing countries’ financial resilience to climate risks.
“In 2024, UNDP’s IRFF in coordination with the UNDP Regional Bureau for Arab States plans to build on this evidence to expand the developmental benefits of insurance and risk financing solutions in the Arab States through the Takaful Alliance,” it said.
With this growth, it is important to consider what Takaful might be used for. Investment in Takaful is more complicated in some areas than general investment but still offers wide opportunities.
“Takaful contributions have grown globally, but growth is mainly driven by the Islamic markets of Saudi Arabia, Malaysia and Indonesia."
“All investments must be Shariah compliant, i.e. investment funds and assets must not contain any element that is haram, or illegal under Shariah principles, such as alcohol or gambling,” said Owais Ansari, Chief Executive Officer, Life & Health, Middle East and North Africa, Munich Re. “Similarly, to the conventional investing world, there is also greater emphasis placed on ESG within Islamic investment, as seen with the growth of ESG Islamic funds.”
The areas in which Takaful investment expands will be important to portfolio construction. “Takaful contributions have grown globally, but growth is mainly driven by the Islamic markets of Saudi Arabia, Malaysia and Indonesia,” said Botelho-Young.
Malaysia, one of the key markets for Takaful, saw its central bank make efforts to build the country’s standing as a global Islamic finance hub, and Takaful has been gaining market share since, said Botelho-Young.
In Malaysia, General Takaful saw growth of 20.1% year-on-year in H1 2023 compared to 21.1% in 2022, according to Fitch Ratings in their Takaful Dashboard 2024 report. This outpaced the non-life insurance growth of 3.2%. For Family Takaful, growth was steady in protection products – whilst the contributions were offset by a decline in investment-linked demand amidst market uncertainties.
The other growth market in this area is Indonesia, where the bottom-up demand for Takaful products is being supported by the decision of the regulator to spin off the Takaful windows into stand-alone Takaful companies.
The growth has also come from expanded economic opportunities in the middle-income countries. “The growing income stature of the working class has also increased the need for insurance and Takaful,” said Ansari.
Whilst the Middle East Takaful market has seen both profitability and balance sheet challenges, the business volume continues to grow – fuelled by the mandatory medical and motor business.
Fitch Ratings said, in March that, Malaysia and Indonesia saw high growth rates in their takaful markets.
However, to be compliant, Takaful insurers must ensure that investments are not from prohibited activities or financial instruments, which could complicate or narrow certain areas similar to ESG-compliant restrictions. Investments must not generate interest so fixed-income securities are not an option. Instead, they largely invest in cash, money market funds, sukuks, equities, and real estate.
“Rising awareness of takaful, will strengthen Malaysia's position as one of the global centres of takaful."
“The increased awareness of medical and weather events coverage is likely to stimulate takaful growth,” said Fitch’s analysis of the Malaysian market, “but [it] will face some headwinds, including the inflationary environment, market volatility, weakening ringgit, and the end of the passenger cars tax exemption”.
Fitch added that it expected profitability and capitalisation of the Takaful sector to remain stable, with sustained growth despite macroeconomic challenges. “A supportive Islamic finance ecosystem, digital transformation and rising awareness of takaful, will strengthen Malaysia's position further as one of the global centres of Islamic finance and takaful."
In neighbouring Indonesia, there were more market moves afoot. The recent overhaul of regulations in the country around capital and solvency could alter sector dynamics.
Indonesia’s regulator, the Financial Services Authority (Otoritas Jasa Keuangan), announced in January that it will raise minimum equity requirements from the end of 2026, which Fitch has said could cause industry developments in a report on the change.
As part of the new regulations, which are known as POJK 20, 23, 24, and 27, the minimum equity for insurance companies to hold will be at least 250 billion rupiah (£13 million) by 2026, 67% higher than the previous minimum level, said OJK.
Fitch Ratings said the new equity requirements will affect Indonesia's Takaful and Retakaful sector and will likely “encourage healthy competition and spur consolidation”, but “some weaker insurers are likely to fall short of the requirements”.
“We forecast the sector’s contributions to grow by 5%-10% in 2024, supported by Indonesia’s position as the sixth-largest takaful market globally and the potential from its low insurance penetration rate, halal businesses and takaful window spin-off,” said Fitch in a February report on the changing Indonesian market. “This is despite multiple challenges including the new requirements, the population’s low financial literacy in sharia products (9% in 2022), volatile profitability, distribution channel gaps and the sector’s small capital base.”
Elsewhere, other Takaful companies, such as Abu Dhabi National Takaful Company (ADNTC), have reported a return on equity of 22% – a significant improvement from 4% in 2022, said Fitch.
One specific area that remains unattended within the Shariah Compliant investment offerings is long-duration Sovereign and corporate Sukuks, said Ansari.
Given various governmental plans to boost the private sector's contribution in the post-retirement burden sharing, he said, Takaful operators do see the need to offer long-duration savings and pension plans targeted at retirement solutions. However, the shortage of matching duration investment instruments restricts the ability to address the growing demand.
“There is greater emphasis placed on ESG within Islamic investment, as seen with the growth of ESG Islamic funds.”
“All investments must be Shariah compliant, i.e. investment funds and assets must not contain any element that is haram, or illegal under Shariah principles, such as alcohol or gambling,” said Ansari. “Similarly, to the conventional investing world, there is also greater emphasis placed on ESG within Islamic investment, as seen with the growth of ESG Islamic funds.”
The wider investment market around Takaful is likely to continue, Fitch’s Indonesia Takaful Dashboard said, and “contributions from general sharia grew further” whilst “net profits also rose due to favourable investment yields”.
However, the analysis added, that inflation could lead to stagnant vehicle sales in 2024, impacting the growth of general sharia. Since the increase in interest rates, there is an opportunity and demand for structured investment offerings with capital protection. This opportunity might be more relevant for the Middle Eastern markets given the targeted end customers are high net-worth individuals looking for shariah-compliant capital protection.
Regardless, it seems that Takaful insurance has finally found its footing and will now be taken seriously as a financial product – meaning its flows into the investment market will become more important.
