Islamic insurance, namely Takaful, is a modern and innovative approach to managing the demand for an instrument that can mitigate an individual’s exposure to specific types of risk. Literally translating to ‘solidarity’, Takaful is a Shariah-compliant arrangement whereby policyholders, as a collective enterprise, pool together their resources in order to aid other members against losses. As opposed to transferring losses to an insurance company which is practiced by conventional insurance, Takaful policyholders distribute said losses amongst themselves.

Takaful or Islamic insurance was first introduced in Sudan in 1979. Since then, takaful has seen much of its growth in countries with dense Muslim populations such as Saudi Arabia, Malaysia, Egypt, Bangladesh, Pakistan and Indonesia. Even in countries with a lower percentage of Muslim citizens such as the UK, Sri Lanka and South Africa, Takaful companies have already made their entry.

Takaful and Conventional Lines


While the industry is still a long way away from standing alongside conventional insurance, it is undoubtedly surging as the growing feature of the insurance landscape and is now rooted in the global insurance industry.

Source: Millimam analysis of industry data. (In terms of 2015 GWP)

Growth Partners in the UAE

The UAE is the second largest Takaful market in the GCC region, whose gross Takaful contribution accounts for 15% of the total Takaful contribution in the whole region. In the UAE insurance market consisting of 60 insurers overall, there are eleven Takaful operators offering both life and non-life policies such as vehicle, travel, health and other commercial lines. Over the last couple of years, UAE’s regulatory framework has undergone modifications to align the insurance industry with international standards. Comprehensive laws were introduced and implemented in 2010 by the Insurance Authority (IA) to regulate the local Takaful industry. In 2015, the UAE adopted new prudential Takaful regulations to improve the overall capital condition of the sector and mitigate negative effects of market turmoil on insurers’ ability to meet their obligations by giving insurers and regulators early warnings if these disruptions could create an unwarranted level of risk. The UAE Insurance Authority Regulations are split into capital adequacy, policyholder fund requirements and data keeping. Other newly introduced measures include preventing conventional insurance companies from offering Takaful products through windows, new corporate governance guidelines to ensure better Shariah-compliance and the entry of foreign players.

Despite the general decline in premium growth across the GCC in 2016, the Takaful sector in the UAE showed the most favourable growth with a rate of 6% which were contributed by rate increases for motor insurance and premium income from new covers for compulsory medical insurance in Dubai. ASCANA Takaful recorded a year-on-gross premium growth of 60% in 2016, followed by Takaful Emarat and Methaq Takaful with at least 40% courtesy of the Dubai Health Scheme.

Underwriting profitability remains the key issue for Takaful providers. The publicly listed providers in the GCC churned out an estimated combined pre-tax profit of about USD 683 million (Dh 2.5 billion) in 2016, compared to USD 274 million in 2015.

Although Saudi players generated the bulk of the profits, eight listed Takaful companies in the UAE, which had a market share of 16% by gross premiums in 2016, were particularly weak compared to all 29 listed insurers in this market. These companies suffered a combined net loss of USD 24 million, while the remaining 21 listed providers brought about a combined profit of USD 270 million.

The overall results of the UAE’s Takaful sector were dragged down by one company that suffered exceptional losses of USD 48 million in 2016 and USD 44 million in 2015. However, five out of the eight listed Takaful companies generated a net underwriting loss of USD 64 million in 2016, as opposed to USD 32 million in 2015. The Takaful industry struggles in terms of operating performance as companies often write less-profitable personal lines and their premium income is too meagre to dilute their fixed operating costs. Furthermore, in 2016, new regulations caused some companies to strengthen their reserves which were an additional strain on their results.

Despite market challenges Abu Dhabi National Takaful, consistently generates strong combined ratios and outperforms the average combined ratio of the listed conventional insurers in the market. Although its gross premiums are relatively small, the company benefits from its relatively low exposure to highly competitive personal lines and focuses instead on stronger performing commercial lines and family (life) business.

The GCC Market

The GCC Takaful market continues to dominate the worldwide Takaful industry, showcasing strong growth since 2010. Despite expectations for continuous growth in the upcoming years, the extent is largely dependent on the performance of the GCC’s economy. Consistent volatility in oil prices have the potential effect of slowing down the region’s economy, resulting in spending cuts or restrictions by some of the member nations, including infrastructure projects. Such limited spending could impact the performance of the insurance and Takaful market. GCC’s stock market may remain unstable until the oil prices stabilise in the long term, possibly resulting in low investment returns for insurers, given their high exposure to the equity markets. The penetration rate of in the GCC countries has remained quite low at not more than 2% and the healthy growth of the region’s insurance industry in the last couple of years can be attributed compulsory insurance coverage enactments for residents, such as medical insurance in Saudi Arabia (in 2004), Abu Dhabi (in 2006) and Dubai (in 2014); and motor insurance which was made compulsory in all GCC countries.

Therefore, growth was mainly due to the mandatory requirements imposed on certain types of insurance rather than due to the increasing popularity of insurance product for controlling and managing risk. In some of the GCC states, in addition to the Takaful laws and regulations in their respective states, Takaful operators are also required to apply the guidance provided by Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).

Saudi Arabia accounts for almost half of the global contributions and will likely remain the core market of Takaful business while UAE, Qatar and more recently, Oman, continue to set the pace for the development of Takaful products in the Middle East and West Asian markets. The low insurance penetration rates among key Muslim rapid-growth markets pave the way for opportunities and potential for growth in Takaful product lines, particularly in the areas of family Takaful and medical insurance.

South East Asia vs The GCC Markets

South East Asia takes over life Takaful whereas GCC markets dominate general Takaful which had an overall market share of 88% in 2015. Saudi Arabia and UAE witnessed the strongest growth in general Takaful with 20% and 19% growth in total contributions respectively in the same year. As a result of high growth in the UAE due to the introduction of compulsory health insurance in Dubai, family Takaful in the GCC has seen a record growth of 34% in total contributions in 2015.

Across countries in South East Asia, large segments of Muslim populations are present that currently purchase conventional general insurance policies which provide significant opportunities for Takaful companies to compete effectively with conventional insurance providers.

With greater outreach, extensive product lines and improved regulation, the future of the global Takaful industry looks bright. According to a report released at the 2015 Global Economic Summit, it was estimated that the total volume of global Takaful business is to hit USD 52.5 billion by 2020, increasing by 80% over five years.

The Takaful industry has gained momentum and appreciation across the boundaries of Muslim-based economies. This prevalence is expected to continue and expand its reach into emerging markets in the Middle East, Africa and South Asian (MEASA) regions, as well as establish a dynamic Islamic financial system with sustainable growth. While the Takaful industry has shown great potential, it is with no doubt that challenges exist in the horizon.

Issues and Areas to work on

  • Fragmented markets, a lack of uniformity in standards and undifferentiated competitor strategies serve as obstacles in the industry. Among the GCC countries, competition, operational issues and the lack of qualified talent continue to stand as hurdles. The industry needs to re-examine its strategies, operations and regulations in order to establish a sustainable ecosystem.
  • The new risk-based regulations in the UAE are considered a hindrance for many smaller and less-diversified insurers with tight capital buffers. Takaful providers constitute a fair portion of this segment and several companies will be particularly affected by the new rules, which will need to be fully implemented by the end of 2018.
  • The total shareholders’ equity of four out of eight listed Takaful providers in the UAE was below the minimum capital requirement of USD 27.2 million (Dh 100 million) based on the new regulations. Accumulated losses due to weak underwriting results at some companies have resulted in a drop in their overall capital positions. Also, Takaful companies usually allocate a considerable proportion of their assets to illiquid real estate investments for Shariah compliance, which may lead to additional volatility in their equity positions if real estate prices in the region continue to decrease.
  • Approximately 85% of the UAE’s population constitutes of expats and consequentially, there is a need to create more awareness about the concept of Takaful and the products available in the market, in order to fully explore all untapped customer segments. Another area which needs work is clearing the misconceptions as it is often incorrectly assumed that Takaful is only meant for Muslims to use or there is something lacking in the product, due to its religious nature. There also needs to be clarification on the ethical nature of Takaful structures, as quite a number of Muslim consumers are still wary of Takaful products.
  • A global Takaful reference body needs to be established to help organise the industry, deal with emerging disputes and harmonise standards. It will also provide a less costly and more effective solution for consumers.
  • Niche products can be created via an innovative platform for Takaful products.
  • The re-takaful gap can be filled by encouraging the presence of different players.