Takaful undertakings will not have suffered materially on the underwriting side of the business from the COVID-19 pandemic, and this appears to be borne out by the limited data available, says the Islamic Financial Services Board in its “IFSI Stability Report 2021” released last week.
Where 2020 data are available, there do not appear to be any substantial declines in contributions, nor substantial increases in claims. In particular, the health insurance category has not suffered badly, and motor claims have declined. In addition, the main takaful markets are not ones in which business interruption insurance is a substantial feature of commercial life, and large-scale event cancellation business (such as for international sporting events or conferences) tends to be written in the conventional market.
The investment side of the business is harder to gauge, says the report. While investment risks from the savings component of family takaful are passed on to participants, this is not true in the same way as the protection element or general takaful. However, information on the impact of the pandemic on takaful undertakings’ investments is not yet widely available and will also depend on the economic responses made to the pandemic in each jurisdiction. Where the evidence does exist, it does not suggest a major financial impact.
Some takaful operators, like their conventional counterparts, are known to have extended payment holidays of various kinds to participants. In some cases, this has been the result of regulatory pressure, but no systematic information is available on such practices internationally. To the extent that contribution deferrals relate to the risk protection rather than savings elements of takaful, there is a potential for adverse impact on the takaful undertaking’s finances if the deferred contributions are not caught up. However, such impacts seem likely to be marginal.
There is also some evidence that, as in other financial services sectors, the pandemic will accelerate digitalization in insurance, though the precise technologies that will benefit will vary by country and region.
The takaful segment’s share of the Islamic financial sector’s total assets remains marginal. The takaful segment’s share stood at 0.9%, with an asset size of $23.1bn at end-2019.
Saudi Arabia and Iran are the largest takaful markets by a considerable margin, and both are entirely Islamic.
The report outlines the impact of COVID-19 on takaful markets around the world:
In the case of Saudi Arabia, 2020 data show that for general insurance, gross contributions for 2020 were 2.3% up on 2019. Health insurance grew at 1.6%, slower than in recent years. This change was driven by a decline in the number of non-Saudis insured, particularly from low-income workers leaving the country as a result of the economic pressures caused by COVID-19. Motor premiums showed a decline of 2.9%, partly as a result of the two-month free coverage offered to retail policyholders as a gesture of goodwill to reflect reduced vehicle usage during the lockdown. Other areas of general insurance increased, with some evidence that this may have been driven by major commercial projects. The figures for protection and saving products were up by 3.3%, though they are a small part of the overall total.
Net claims incurred in health insurance fell by 1.9% due to the government taking over responsibility for the treatment of COVID-19 patients, while others deferred non-urgent treatments. Motor claims fell by 13.8%, for several reasons of which reduced use in lockdown was one. With these two classes dominating the general insurance sector, overall claims and the loss ratio both fell. Mainly because of this improved underwriting performance, the overall profitability of the sector increased. The takaful industry in Saudi Arabia has thus not suffered significantly from the effects of the pandemic.
The available data on Iran are very sparse. Reports indicate that contributions in 2019–20 increased by 35.8% in the local currency, while claims increased by 18.2%. Nine companies accounted for over 80% of contributions, with the largest, Iran Insurance Company, more than three times the size of its nearest rival. The market has been substantially isolated from international insurance and reinsurance markets in recent years as a result of sanctions, and risk will therefore be retained domestically, with investments also being made on a domestic basis.
GCC other than Saudi Arabia
The countries of the GCC other than Saudi Arabia have seen some significant developments
In the GCC in general, levels of insurance penetration are low. The growth of takaful has been driven largely by health insurance, with increased regulatory requirements for cover, including for migrant workers. Takaful has not been a primary method for long-term savings, though there are some signs of growth in that area. The UAE has seen insurance growth well ahead of the global average in recent years, but in 2019 gross written premiums grew by only 1%. Takaful premiums, on the other hand, grew by 3.8%, raising the takaful share of the market to 16%.
It is in health insurance, in particular, that takaful has taken market share from conventional companies, though it has also done so in life business, particularly group credit life. Retention ratios have also increased and are generally higher than those of conventional companies, even on a class-by-class basis. This may, however, reflect a greater emphasis on high-frequency, low-severity business.
In Bahrain, takaful companies saw an increase in market share, from 28.0% in 2018 to 31.7% in 2019, partly reflecting a more than doubling of their previously small family takaful business but also their limited shares of those classes of general business where premiums have declined.
Besides Iran, the countries of the Middle East and South Asia group are a diverse set. The most significant in absolute terms are Jordan, Pakistan, and Bangladesh. In Jordan, total takaful contributions rose to $100.1m, comprising $87.7m of general business and $12.3m of the family business. This represented an increase of 5.2% for general business and 11.3% for family business over the previous year – a market share of 11.7% for general business (up from 11.3% in 2018) and 10.2% for family (up from 9.1%).
Data for Pakistan are incomplete mainly because one company, whose license is currently suspended, has been unable to file accounts for 2019. The data available, however, show a market where takaful has been growing rapidly since takaful windows were permitted. Total takaful contributions in 2019 were $265m, representing 11.7% of the total market, with 71% of these contributions coming from windows. Both the overall market and the takaful market are dominated by life (family) insurance, which makes up 73% of the total market and 68% of takaful. Windows are marginally less dominant in this sector than in general takaful.
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Data for 2019 for Bangladesh are incomplete. While an overall premium figure is available, figures are not available for all takaful operators. However, those for which figures are available accounted for 93% of takaful contributions in 2018. It was therefore considered reasonable to estimate figures for the remaining operators. The market is dominated by family takaful, accounting for almost 93% of contributions in 2018.
In Africa, the overall takaful data are dominated by Sudan, Egypt, Tunisia, and Kenya. There are smaller presences in Nigeria, Senegal, South Africa, the Gambia, Mauritania, Zambia, and Algeria. For some of these countries, data were not available for inclusion in this report.
Takaful is expected to launch in Morocco, following the passage of legislation in 2019, but this has taken longer than hoped.
The Egyptian insurance market is dominated by the state-owned company Misr Insurance, which has some 45% of the market. There are 11 takaful undertakings, with an overall stronger presence in the non-life sector of the market. These undertakings include the Misr group’s takaful subsidiary, Misr Takaful. In 2020, Misr was in the process of establishing a new family takaful company with external partners. This will provide a strong basis for the development of the family takaful sector in a country where the life insurance business accounts for almost half the market.
Nigeria has a very low insurance penetration, even by the standards of economies with similar GDP per head. In recent years, the growth in premiums has not kept up with inflation. The sector is also undergoing major restructuring, following new capital requirements. There are four takaful companies, all with composite licenses, but these account for less than 1% of the insurance sector. This is a somewhat lower percentage than in Kenya, where there is just one takaful company but a larger insurance market overall.
In South-East Asia, the key takaful jurisdictions are Malaysia, Brunei Darussalam, and Indonesia. In Malaysia, gross contributions for general takaful were $809m. This represented approximately a 20% increase in 2018, despite a slight decline in the exchange rate, and an 18.6% share of general business premiums. The Malaysian market is, however, dominated by the family business, with $2.1bn, representing approximately a 15% increase in 2018. Family takaful accounts for 18.6% of total life business.
2020 data for Malaysia show a continuing, though modest, growth in contributions for both general and family takaful, implying that, although growth has slowed because of the COVID-19 environment, there has been limited damage to the business.
The Indonesian takaful market is dominated numerically by windows. At the end of 2019, there were 12 full-fledged takaful companies and one retakaful company, but 47 takaful and two retakaful windows. Some of the windows are small, and it is the policy of the Indonesian authorities to move them to full-fledged status (though possibly as subsidiaries within a group). Takaful business has been growing marginally faster than its conventional counterpart but is still only around 6% of the direct insurance market.
The Indonesian market is dominated by life insurance, and family takaful has a slightly higher market share of its market than that of general takaful, with a somewhat greater growth rate. There were, unfortunately, two defaults by (conventional) life insurers in 2020, and it is possible that a loss of confidence, as a result, may spill over to the takaful market.
In Turkey, takaful is referred to as “participation insurance” and, although it had operated before, it became the subject of specific regulation in 2017. A further regulation, adopted in 2020, makes important changes, no longer requiring a tabarru-based contractual relationship. The Islamic insurance market has grown rapidly in recent years, to account for some 5% of the total in 2019. This involved a remarkable increase in contributions in 2019, up by 54% in local currency terms and 37% in US-dollar terms.
There are currently two full takaful undertakings and five takaful windows offering general takaful and two full undertakings and three windows offering family takaful. It is, however, the general business that is dominant in financial terms.
The following table gives an indication of the size of takaful businesses in different countries:
|Market(2019)||Takaful contributions by jurisdictions ($m)||Takaful share of the insurance market in the country|
Courtesy of: Middle East Insurance Review
Source: IFSI Stability Report