The demographic and market changes throughout the Middle East and North Africa (MENA) region have significantly widened the scope for regional insurance company operations. The changing demographics have allowed insurance to take on a role of social care that the family circle used to possess on a social scale.

Currently, the regional insurance industry is merely 1% of the GDP (compared to 5-7% in the US), highlighting the fact that the insurance sector in the MENA region is relatively untapped. However, insurance is now emerging as the main protector of wealth, family, health, motors, development projects, etc. across the region. Michael Bradford, senior reporter for Business Insurance Europe, believes that “there is a demand for insurance coverage in the region and local insurers are being called on to write much of it.”

Although the rates of insurance in the region are lowest among most emerging markets, the current growth rates in the regional insurance industry in recent years exceeded those of globally registered companies. Top members of the regional insurance industry hold varying opinions regarding the potential growth of the insurance market throughout the MENA region.

Rates of growth

It is difficult to substantially declare a particular figure for the growth rates of the entire MENA insurance industry, as there is a large deficit of available research and statistical figures. There seems to be no reason to suspect that the overall value of the MENA insurance industry exceeds $10 billion in premiums at present. In 2007, the global insurance-to-GDP rates were dominated by the UK (15%) and Korea (14%), with the Middle East hardly scratching the surface at 1% of the GDP.

However, the UAE insurance industry alone is more or less valued at $3.5 billion, representing 42% of all markets in the GCC. The 2006 Swiss Re Sigma Report valued other regional markets, such as Saudi Arabia, Qatar, Lebanon, Morocco, and Egypt at $1.6 billion, $573 million, $656 million, $1.67 billion, and $840 million respectively.

A study conducted in October 2007 by EFG-Hermes noted “high GDP growth rates [in the UAE] and strong immigration driving insurance demand, but the rapid development of the mortgage market and strengthening of health insurance legislation is providing the uplift over the next couple of years.” EFG-Hermes also pointed out that in the Saudi insurance market, “the demand in the short term is driven by the creation of a competitive market relieving pressures and changes in motor and health insurance legislation also creating a steep change in demand.”

Growth rates for Takaful (Islamic insurance) are measured at approximately $2-3 billion globally in 2006 through 2007, with the GCC itself accounting for one-third of this growth. Whilst it is expected to increase at a 20% annual rate, it is important to note that Takaful, by comparison to traditional insurance, is still quite a small market.

EFG-Hermes defines three key factors that drive insurance sector growth in the region as: “the high GDP growth rate, the propensity for developing and newly developed countries to spend a disproportionate percentage of any increase in GDP on insurance, and the extremely low penetration rate of insurance products in many Middle Eastern countries.” Clearly there are “strong economic arguments which drive areas of insurance, such as motor, health, liability, and these are well understood by governments in the region.”

Management of growth

Growth management of the insurance industry is an operation of great complexity. Without a doubt, managing growth in such a large region comes with many challenges and stress. Most top members of the industry interviewed by Executive see that companies are managing their growth well, but with much room for improvement. Dr. Saleh Malaikah, CEO of Dubai-based SALAMA Insurance, believes that “companies in the region are coping well with the situation,” yet conceded that “one cannot say it is without challenges and issues.”

Further, Malaikah trusts that much of the growth of the insurance industry is credited to the establishment of so many new Takaful companies. Malaikah holds that “the Takaful industry has been the sole beneficiary of all the new insurance companies in the area,” as most of the recently established companies in the region are Takaful companies. Whilst growth management faces numerous challenges, other leading players also present positive opinions regarding the industry’s handling of growth.

Osama Abdeen, Vice President of AIG MEMSA, similarly stated that “there is a huge growth happening” in the insurance market, which is accredited to many factors such as infrastructure growth, increase of personal wealth, and mandatory insurance. He added that “the area is witnessing a huge growth in infrastructure and many other energy projects. Projects either already underway or currently started are estimated to be over $1 trillion in value,” and undoubtedly this “has given a boom to insurance requirements, since there is a lot of finance and lending requirements and FDI, [thus] increasing the demands for insurance.”

According to Abdeen, such compulsory requirements are “contributing to growth in this area.” AIG MEMSA has recognized such market increases and is working diligently on creating new market segments. Abdeen noted that there also seems to be a “new demand for travel insurance, personal accidents, and thus people are becoming more and more aware to purchase cover, so to protect their interests.”

Another aspect that Abdeen observed as a continuous contributor to the overall growth of the regional insurance industry is the increase of wealth; this “on its own has increased the demand for insurance requirements, whether on the commercial corporate side or on the personal side.” In order to properly stabilize the insurance market’s growth, Abdeen pointed to the need for a “multiple approach” to growth management. Even though, as he feels that “it is difficult to comment how each company is operating,” he thinks “there are some companies who are operating in focusing on one line, and not a multiple approach. In my opinion, a healthy growth should always be aligned, and achieve a mixed, but balanced portfolio.”

According to Gamil Osman, the Assistant General Manager of Kuwait-based National Takaful Insurance, “regional insurance companies are managing their growth properly,” in both the local and outside markets especially considering the “view of high competition in some insurance markets such as Kuwait, and the UAE which push some companies to expand outside their local markets.”

As the General Manager of Abu Dhabi National Takaful, Oussama Kaissi finds competition to be a key factor that is affecting the management of growth in the region, as “in a fast changing environment, leading and managing profitable growth is critical for the development of sustainable competitive advantage. Managements in the MENA region in general are increasingly facing pressure for short term results, slimmer profit margins, more international competition, a polarization of traditional markets, not enough leadership in strategy and change execution and more demanding boards to deliver ambitious business results. These issues vary in severity from one market to another and from one company to another while operating in the same market.”

Without proper leading managament and professionalism, growth management will constantly face challenges in the regional insurance industry, and thus long term results will also be affected. Kaissi’s view echoes the industry’s dire need for proper management in order to obtain desired growth management results throughout the insurance market.

More moderately speaking, Bradford thinks that “local commercial insurers appear to be taking a measured approach to growth. Most of these companies do not have sufficient capital to provide all the coverage the region needs, so they hand off a lot of the risk and much of it is going to foreign insurers in the international insurance market.” Yet, Bradford does acknowledge the growing demand for insurance coverage throughout the region and thus the increasing role that local insurance companies are stepping up to play.

Other top players are less optimistic. CEO of Daman Health Insurance (Abu Dhabi) Dr. Michael Bitzer strongly believes “too many insurance companies here act more like brokerage companies,” hence creating “a significant space for improvements in all areas, being it in how you sell, how you administer products, how you develop products.” In order to create room for growth stability, “in general, and most importantly, you need management teams with excellent leaders on top; that’s number one. The leadership team has to have expertise and have the willingness to learn.”

Further, Bitzer feels that “external entities from other industries and from the insurance industry must help to improve overall performance” of the regional companies in order to create “a little bit more enthusiasm and openness for change.” Ending on a rather optimistic note, believing that “there is improvement” at present, Bitzer, like his fellow industry leaders, forecasts that by working on key issues such as leadership, professionalism, human resources, information technology, etc. growth in the insurance industry can only be better managed in the future.

Insurance penetration in selected MENA / SE Asian countries as % of GDP (2006)

General insurance by country

Life insurance by country

Effect of mandatory insurance on industry growth

Mandatory insurance is definitely creating a stepping-stone for regional sector growth. Since the implementation of mandatory health and motor insurance (for expatriates) in GCC countries such as Saudi Arabia and Abu Dhabi, the growth of the regional insurance market is without a doubt being positively affected. Osman finds mandatory insurance as “one of the keys to helping the growth of the insurance industry.”

Abdeen also feels that increased implementation of mandatory insurance plays a significant role as its contribution has added to the increase of insurance business activity with companies. “Like you have seen in Saudi Arabia, medical coverage is becoming a requirement; and now it has started in Abu Dhabi. All this on its own, increases the demand for insurance” throughout the region, he said.

Kaissi similarly stated that, “without a doubt, if insurance was to be made mandatory, we will have a completely different outlook of the future of the industry in our region.”

Drawing a parallel to Kaissi’s view, Bitzer is “convinced that if consumers make good experience with mandatory insurance products, they will then buy other insurance products in the future.” Like some of his competitors, Bitzer mentioned that the “increase of awareness for health care and the increase of the whole region leads to higher market products insured, because these people understand that health insurance makes sense.”

According to Tal Nazer, CEO of BUPA Arabia for Cooperative Insurance Company in Saudi Arabia, health “insurance companies have done a very good job. [Especially] when you talk about a market in Saudi where in July 2006, the market size was around 1 million customers,” and is now at approximately 3.5 million customers.

Nazer credits this surge in customer base to “the enforcement of health insurance.” The health market is clearly being positively affected by compulsory enforcements.

Considering the sudden boom over a period of eighteen months, Nazer added, “insurance companies in general did quite well in absorbing the volume, without any hiccups in the growth of the market.” Nazer trusts that in terms of “absorbing the volume and working to improve the service levels for the customers,” the Saudi market is performing efficiently.

According to Nazer, “Saudi has done quite well for three major reasons. One is that they required all insurance companies to be publicly listed, [which] creates awareness among insurance companies at the interest to understand what these companies do. The second thing that also helps is the enforcement, which helped the growth of the industry. The third reason is the need for insurance,” which may be the same reason in other countries, and “people are looking to go into private hospitals, they want immediate access to treatment, and they do not want to be on waiting lists in public facilities.”

Further underlining mandatory insurance as a central contributor to insurance growth throughout the region, Nazer said that mandatory insurance “will definitely bring in more education on the insurance industry as a whole.”

Among the insurance executives, Kaissi stood out in cautiously warning that mandatory insurance is only secondary to increasing growth, when he noted that “we have to also be aware that awareness is the key for growth and not mandatory insurance. We have many insured [customers] that purchase insurance because they are forced to do it and not out of conviction. This does not help in cross selling our products and services.”

While most see the new trend of mandatory insurance as positive enforcement over a highly uninsured population, Kaissi justifiably feels that awareness of insurance is a more influential force on consumers to purchase insurance; without being told what insurance is all about, people are not going to go searching to ‘be in the know’.

Nazer agreed in that “because of the awareness that is happening,” due to enforcement by regulators in Saudi, “people are looking to get their insurance. So [awareness] definitely helps.” Malaikah also feels that “because of more activity in the media coverage about insurance, and because of medical and TPL (Third Party Liability) becoming compulsory in some of these markets increases the awareness, there is a possibility for horizontal expansion for these clients in other services of insurance.”

Malaikah mentioned the benefits of compulsory insurance. For example, he said, “if it becomes compulsory for me to take TPL or medical, I am now a beneficiary of any insurance service, so definitely I would think of covering other areas as I become educated about them.”

But Malaikah doubts that TPL and other insurance products will ever become compulsory in the industry. “The trend is going to continue in the GCC, but I am not sure if this is something that is going to be copied by countries outside the GCC that do not share the same demographics,” adds Malaikah.

The jury is still out on whether compulsory insurance will catch on in other countries throughout the MENA region or not.

Some industry leaders feel mandatory insurance has the potential to arise in other countries, while others are more wary. Many believe enforcing mandatory insurance throughout the region will not happen until the industry solves the main challenges it faces at present (such as growth management, human resource issues, etc.) and increases awareness, whilst those holding opposing opinions say mandatory insurance helps raise awareness and thus proliferates growth of the industry. Clearly, there is a circular argument of differing opinions present amongst industry leaders. Only time will tell whether mandatory insurance is the driver of awareness or if its potential depends on awareness.

By Asset Size: the largest insurance companies in the Middle East and North Africa and their net performance in last published year

Major regional insurance companies listed on stock exchanges

Growth potential

EFG-Hermes reported in 2007 that “other drivers of structural under-penetration are however very long term — such as the demographic structure and low tax environment — and consequently [concludes] that insurance penetration will not reach the levels achieved by countries with similar levels of GDP per capita.” Fortunately, EFG-Hermes predicts, “there are several years of strong growth ahead for both the insurance/Takaful industries in the region.”

Malaikah believes that “there’s a very big potential for growth of the insurance industry merely due to the [current] economic growth. Insurance as a service industry is benefiting from the general economic climate. With all the growth, however, comes stress.”

Abdeen is “very optimistic,” as his company anticipates and is working towards “great growth across all lines and more capabilities using technology to provide services.” AIG currently has plans in the works for expansion into “new territories and new countries so [to] provide [their] services and reach the customers more efficiently.” More specifically, the company is currently looking at North Africa as well as other Arab countries to expand in as it is on their “radar screen” and they are “very keen” as they see “a lot of advantage in doing so.”

Kaissi also presented a positive outlook for the industry’s growth potential, stating that “the MENA region insurance market is living its golden years,” and “as practitioners, [we] should leverage upon these positive conditions to bring about the required transformation and build a solid foundation for our industry.”

In line with the opinions of some of the insurance industry’s top players, journalist Bradford forecasts “continued growth” in the regional insurance industry as he believes “there [have] been so many factors converging in the region to stimulate the growth of the insurance market.” He trusts that, “with local economies booming and governments in places such as Bahrain working hard to encourage the population to protect their health and assets, insurers seem poised to grow substantially. Add to that the number of construction and infrastructure projects underway and planned in the region and you have a similar outlook for the commercial side.”

Osman feels “regional insurance companies are doing well,” and expects “more growth from Takaful and reTakaful companies” in the near future.

Wazen believes the Egyptian insurance market alone possesses “a big potential,” as the local population stands at 75 million, although he noted the lack of awareness in the country. If 20% of the Egyptian population purchased insurance, according to Wazen, “it would mean you gain 15 million customers.” Currently, the Egyptian market is “far below even 10%.”

The potential for health insurance also possesses great prospects in the region, and like the insurance industry overall, growth of the sub-sector is facing many obstacles to overcome. Saudi Arabia and Abu Dhabi are two markets that have recently implemented compulsory health and motor insurance.

As far as the Saudi health insurance market is concerned, Nazer expects “to have the insurance market to double in the next year and a half to reach around 7 million customers,” seeing that the market is growing since regulators have enforced health insurance throughout the kingdom.

Bitzer, however, feels the current “growth of the health care sector in the UAE lags behind the growth of insurance,” as even although “people who were not able to afford the treatment before can now afford it with the health insurance card,” it is still leaving some private providers “flooded with patients.” Bitzer believes that time is of the essence and is greatly needed for private providers to be able to widen their capacity, but still holds “they are all on the right track.”

Overall it seems the prospects for growth in the MENA region is quite great, but its true potential is largely dependent on growth management, dealing with the major concerns of industry, and product availability throughout the region.

Over or under penetration relative to countries of similar GDP (FY 2006)

While the region goes is growing tremendously, the insurance industry is facing a major challenge related to its profitability, but, if well managed, can put the industry at the forefront of financial services in the regional economy. Driving top line growth is relatively easy considering the economic boom — the challenge for shareholders and managers of insurance companies is driving the bottom line at the same time.

By its very nature an insurance policy is a contract relying on inverse pricing, meaning the selling price of the policy is set well before the final cost is known to the insurer. On this basis an aggressive growth strategy can destroy the bottom line rather than enhance it. So to grow, an insurer must push away price competition and differentiate itself through products, services, focus and market reach. The insurer must develop new products, improve service, cross-sell and enhance distribution networks, while also balancing increased efficiency with cost controls through better operations, enabling them to better manage claims, reach and retain customers, improve underwriting capabilities and strengthen reporting and monitoring. Human resources are scarce in the industry though, with a growing number of insurance companies and the structural under investment in talent throughout the region.

So how would an insurance company shareholder or would-be shareholder of a new company improve his return? They both can growing organically or merge and acquire. Would-be shareholders can set up a brand new company or acquire an existing operation. So the question is when and how. First, let us define the investor; is he coming from the insurance industry and looking to expand in the region or coming from outside the industry and looking to add insurance to the activities of the conglomerate. When the insurer is experienced in the insurance market and the country’s environment, an acquisition would be preferred, as it provides an advantage of faster entry, reducing the opportunity cost of wasting time while the market is growing rapidly. Governmental barriers must be considered — can the investor get a new license or are acquisitions encouraged. When the partners are from outside the industry an acquisition is difficult to handle because of the equity price the investor will pay when they don’t know whether this price is for real, considering the intrinsic valuation difficulties of the insurance business. Not any company is a good target considering poor corporate governance and enterprise risk management of some companies. More preferable for an outside investor is to go for a joint venture with a market player looking for entry into the specific territory. No doubt that joint ventures will be preferred if the industry is concentrated or when it is used as a mechanism to reduce transaction costs incurred when acquiring other firms.

Considering the above, why go through M&A. On the macro level, we are undergoing a change scope by moving from national markets to a regional market and soon enough a worldwide one. As competition increases companies will have to grow rapidly to stay competitive. But how can one grow aggressively when bottom line does not follow the top? Shareholders will have to think of M&A. During a growth period it is always the case that many new companies are founded however with the atomization of the market, the outlook for growth and survival of start-ups becomes negative. With new regulations in the region, companies will face heavy financing needs with reducing returns on equity due to the weaknesses in managing the competitive forces, which, in the end, will push major groups to move out of the industry.

On the micro level, companies that go through M&A are looking for a level of efficiency, productivity and profitability. The acquirer has to be first a very efficient and well managed company and once this level is reached the acquirer looks to improve his bottom line even further through economies of scale on the structure, IT, marketing, creation of products and risk management. They improve bargaining power in purchasing reinsurance and advertisement. The acquirer can benefit from synergies and complementarities in terms of markets, territories, products and distribution networks. The larger size can reduce the effect of economic downturns and softness in the insurance cycle. Finally improve margins by improving market share because of the leadership position.

When 50% of M&As around the world do not succeed, the insurance industry has to manage challenges of its own to make an M&A operation a success. Firstly the valuation challenges and listed among others, the long duration of liabilities, the art of loss reserving, the cyclical nature of the business, the impact of reinsurance, the impact of statutory accounting, regulations and finally interest rates and capital market fluctuations. The value of an insurance company is broken down into several distinct parts. The adjusted book value (ABV) must be assessed carefully considering on one hand the hidden capital gains and on the other the difficulty in assessing liabilities and reserves for outstanding claims, incurred but not reported claims etc. To the ABV must be added on one hand the best estimate of the embedded value, which is the value of in force business and on the other the value of future business and other items such as goodwill etc. Secondly, to run an insurance business you are running risks, underwriting and technical, related to the pricing of products and again reserving, credit risks related to the reinsurance, clients and counterparty recoverable, market risks related to investments and finally, operational risks. Thirdly, the biggest challenge of all is integration of the labor forces and the digestible assets.

The learning curve has its costs whether it is a joint venture, merger or acquisition but the most important thing to keep in mind is shareholder’s return.

Farid Chedid is managing director of Chedid

In my 16 years within the Middle East Life Insurance industry, I have never witnessed such tremendous growth in sales for individual life insurance products as in the last three years. The boom in oil prices as well as the growing awareness of the benefits of medium to long-term savings with protection has contributed to this phenomenon. Statistics suggest that this is just the tip of the iceberg as the Middle East has very low penetration rate for insurance products. To add to this only a small fraction of this is generated from individual life insurance products making the proposition for the future even brighter. So what is the scope of Individual Family Takaful products for the foreseeable future within the Middle East?

In my humble opinion the growth potential is phenomenal. The market is virtually untapped and though traditionally this has been the domain of foreign conventional players, today we see the advent of several Takaful companies. In the last two years all insurance companies launched within the GCC have been Takaful companies. The boom in the Islamic Banking sector has helped shift the preference of the consumer towards Shar’iah compliant products and we in the Takaful industry have benefited from this.

If the population of a country or region, as in the Middle East, is predominantly Muslim and ‘all things being equal’ it is but natural that our Muslim brethren would prefer a Shar’iah complaint Takaful solution over its conventional counterpart. The appeal of a Takaful proposition doesn’t only lie in our religious beliefs as has been demonstrated in Malaysia where a mixed religious consumer base is increasingly opting for Takaful solutions. This is because in a Takaful proposition the underwriting profits are shared with the participants, thus enhancing the product’s value added proposition. A Shar’iah compliant savings plan will also appeal to the ethical investor, as a survey conducted in the UK suggests that ethical investors are willing to forego up to 2% return rather than choose a non ethical fund — with Takaful they don’t have to forego anything.

So for a Takaful company, the challenge then, is getting all things equal or better. This is especially true for individual family Takaful products, which are of a long term nature where the litmus test is not only to offer competitively priced flexible products at the outset of the plan but to maintain a consistently high performance in returns and services throughout the life of the plan. It is possible to create such a proposition as has been demonstrated through the recent launch of SALAMA’s range of individual Family Takaful products that compete like for like with their conventional counterparts. The products are marketed to clients on a need base approach and offer the flexibility to tailor make the plan to suit every individuals requirement. The range of products offered caters to all needs of the individual throughout the life cycle of the client. At SALAMA, we believe that our products being ‘Shar’iah compliant’ should be the ‘icing on the cake’ for the client and not the cake itself.

So why aren’t there an abundance of these Takaful companies in the region? The answer is simple — family Takaful is a long term and complex business, which requires shareholders understanding to invest substantial capital for the long term. Many shareholders do understand this and commit their capital but then are faced with the next big challenge of recruiting professionals with the expertise to create products, systems and infrastructure tailor made to the local market. There is a dearth of skilled professionals in the industry, which makes it a daunting task for shareholders to get the right team in place. One thing going wrong could set back the company by several months, not to mention the associated costs with it. Once these are in place then the management team has to ensure that ongoing services are of a superior quality with quick turnaround times and minimal documentation. Additionally, Takaful companies need to be rated by companies such as Standard and Poor and AM Best to gain credibility in the eyes of the consumer and this is increasingly difficult for a startup company, as most Takaful companies are.

To set up a successful family Takaful company, with the whole range of products to cover all aspects of an individual’s needs, takes anywhere between six months to a year. There have been several Takaful companies who have entered the fray and it is just a matter of time before they are ready to launch their Takaful products into the market. This will bring greater awareness to the consumer of the benefits of choosing Takaful solutions, which will in turn boost the sales figures of all Takaful companies alike. As mentioned, the individual life insurance market is virtually untapped so there is room for growth for both conventional insurance companies as well as Takaful companies, however I believe that the growth potential for Takaful is far greater because of the religious demography of the region and the added value that a Takaful proposition brings to the client.

Noel D’Mello Assistant General Manager- Head of family Takaful SALAMA-Islamic Arab Insurance Company Dubai, UAE

Takaful is NOT an Islamic contract or structure in itself, but rather the result of the combination of two or more Islamic contracts, and in general is the combination of a tabaru’ (donation) operation with one or more Islamic contracts like Wakalah or Mudarabah.

For years the insurance concept was prohibited by Islamic scholars, until 1985, when the Grand Council of Islamic Scholars in Makkah, based on the concept of a cooperative tabaru’ and cooperation, approved the Takaful system as an alternative to conventional insurance. However, the exact method and operation of Takaful was left to Islamic scholars and insurers to resolve develop and implement.

The word “takaful” originates from the Arabic word kafalah, bearing the reciprocal dimension of “guaranteeing each other” or “joint guarantee”.

The concept of “Islamic compliant insurance” dates back to some 1,400 years ago when the Muhajirun of Mecca and the Ansar of Medina would agree to contribute to a fund before starting long voyages, where often they incurred huge losses, misfortunes or robberies along the way. This “common fund” would be kept with one of the group members, and would be used to compensate any member who suffered mishaps during the journey.

General Takaful, or sharia-compliant, life insurance has been traced to another Muslim practice of pooling contributions from a group of people to assist others in need.

Simply put, today Takaful is the sharia-compliant alternative to conventional insurance. But what’s wrong with conventional insurance and why does it warrant a sharia alternative?

Is it the prohibition of riba (interest)? Not really, because riba is not inherent to the insurance business — and one may structure conventional insurance models without interest bearing investments.

Is it the prohibition of gambling (maysar)? But here again, gambling is not inherent to the insurance business. Gambling occurs only if the insurance results in a financial gain to the insured in excess of compensation of damages.

Is it the prohibition of risk? This another misconception. In fact, risk is not prohibited by sharia. On the contrary, risk is intrinsic and inherent to the very concept of halal business and profit. According to sharia principles, reward must be accompanied by risk. But sharia distinguishes between market risk and credit risk. While credit risk alone is not permissible, market risk is a requirement for any halal benefit. This is why for example investment in stock is permissible (market risk) while investment in bonds is not (credit risk).

So what is the major reason for the prohibition of insurance under sharia? This lies in the “gharar” (uncertainty) component of the insurance contract. “Uncertainty” is different from “risk.” Contracts that provide for “uncertain” obligations are not permitted. In conventional insurance, the service offered by the insurer (indemnification of a loss) may or may not be forthcoming depending on whether the loss occurs or doesn’t occur. Therefore, the obligation of the insurer lacks the component of “certainty” and is hence prohibited.  In other terms, whilst market risk is legitimate, the “transfer” of such risk in return for a fee without transfer of the corresponding reward, is not permitted under sharia principles.

So how does sharia overcome these prohibitions? We said that premium payment in return for “uncertain” services is not allowed, but payment of a participation as a gratuitous “donation” for social well being is permitted under sharia.

Under Takaful, premium is not a price for the coverage. Premium is a contribution in a mutual scheme or mutual fund which aim is to mutually guarantee each other against an uncertain event. Whilst in conventional insurance, the insured is a customer of the insurance company, in takaful the insured is both the customer and the principal. Part of the premium goes as an irrecoverable donation to cover any potential losses of any of the participants, and the other part of the premium is invested in sharia compliant investments.

There are two major types of Takaful namely the Wakalah model and the Mudaraba model. In addition, the concept of “waqf” is sometimes used to structure takaful operations.

The Wakalah model is mostly used in the Middle East while Malaysian companies commonly use the Mudaraba model.

Regardless of the chosen model, Takaful is similar to a mutual insurance where the purpose is to share risk between members, thus making it more manageable for each of them. A common fund is created (the Takaful Fund). This represents a percentage of each of the participant’s policy holders payment. The Takaful Fund is owned by the participants (the contributors) and is managed by an operating company the “Takaful Operator” (TO).

One of the most significant challenges of the Takaful industry is the re-Takaful or sharia-compliant reinsurance. This industry is at the early stages of its development and most Takaful companies undertake re-insurance with conventional reinsurers. Finally, it is worth mentioning that some sharia scholars defend the position whereby the insurance business does not violate sharia when the premium is calculated on the basis of scientific statistical computations, given that such scientific calculations remove the component of “gharar,” provided of course that other sharia aspects are complied with. However, this remains an endless argumentation that is arguably unproductive. The Takaful market is real and has incredible growth potential. It is certainly more productive to focus on how to develop and move the Takaful industry forward rather than concentrating on endless theoretical and theological debates.

Nada Abdelsater-Abusamra is an attorney at law in the courts of New York and Beirut. Corporate and advisor to regulators and banks in Islamic finance.