Analysis: Takaful, all promise and little delivery

UK mosque

  • Takaful players tend to use conventional reinsurers instead of supporting the re-takaful sector
  • Lack of customer awareness and price sensitivity are among the reasons why takaful insurers have so far failed to establish in the UK
  • Salaam Halal, which launched in 2008, didn’t raise enough capital to last more than 18 months
  • Insure Halal, which launched in January, is adopting a different approach by focusing on classes of insurance that are not legal requirements

With more than three million Muslims in the UK, there has long been a feeling that sharia-compliant insurance products should find a market but the reality has proved the opposite. So far, every attempt to establish a takaful insurer in the UK domestic market has failed.

2018 opened with another new player attempting to exploit this potential market as Halal Insure launched household and landlord covers. The firm gives little away regarding its ownership or source of capital. Its website says the “site” is owned by Green Dome Financial Services Limited, which is authorised by the Financial Conduct Authority as an Appointed Representative and only incorporated on 8 September 2017. “We act as an agent of insurance companies for sharia audit, sharia compliance and marketing activities,” says its website. Halal Insure was approached three times for comment for this article and has not provided any answers to the questions put to them or put anyone forward for interview.*

The picture when it comes to international insurance written through the London Market is slightly better. The International Underwriting Association believes there could be up to 10 commercial insurers offering sharia-compliant products – mainly reinsurance – to international clients.

The IUA’s chief executive Dave Matcham spoke at the World Takaful Summit in Dubai on 9 April and although he tried hard to find some hope for the growth of the market internationally he was not over-optimistic: “One senses that the longevity of the Islamic reinsurance industry hangs precariously over the edge as already thin profit margins get wiped out by unforgiving competition posed by conventional players.”

The biggest challenge for the re-takaful sector is the lack of support from the big takaful markets in the Middle East, Asia and Malaysia for using sharia-compliant reinsurers: “Without the buy-in from shariah boards to make re-takaful the default search for primary takaful operators before approaching conventional reinsurers, re-takaful operators are unlikely to gain access to higher quality business,” said Matcham.

The prospects for the domestic takaful market look equally unpromising, says Mahesh Mistry, senior director, analytics at AM Best: “There have been a few companies come and gone in this field. They have to find a way of attracting the audience but none have so far succeeded in doing so. Price sensitivity is a problem as the takaful risk pooling model means policyholders have to contribute to creating a surplus.”

His colleague, associate director Salman Siddiqui, believes part of the problem is down to awareness in the Muslim community: “When it comes to the food industry, Muslims have demanded halal food for a long time and there are now plenty of suppliers. A lot are not aware that commercial insurance is forbidden for them and that there are alternatives.”

Part of the challenge for anyone launching a takaful insurance offering into the UK or Europe are the legal obligations to take out various insurances, motor being the most obvious but also business and public liability covers. There is a consensus among most Islamic scholars that where insurance is compulsory, then Muslims can deal with conventional insurers.

Prof Dr Saud Ibn Abdallah al-Fanaysan, the former dean of the Faculty of Sharia at the Imam Mohammad Ibn Saud Islamic University, explained this in response to a question on an Islamic question and answer website: “The fatwas of the majority of scholars in fiqh councils and fatwa organisations forbid commercial insurance as it exists today in most countries of the world, if it is optional and no one is obliged to purchase it. But if it is compulsory insurance and one has no choice, then it is permissible to take out car insurance, for example, and the sin is on those who forced others to do it.”

Terminology

There are two principal types of sharia-compliant insurance.

Takaful is the most common. It is a risk pooling arrangement. The policyholders pay contributions into a pool. This fund is invested in a range of sharia-compliant investments – a rather better developed area of Islamic finance – and claims are paid from the pool. The insurance operator is paid a fixed portion of contributions as a fee for managing the scheme.

When there is a surplus at the end of a year after paying all fees, costs and claims, a portion can be allocated to a reserve fund. The remaining surplus is applied for the benefit of the participants – as in a Western mutual model – or donated to charity.

The alternative model is a co-operative insurance model but this only really exists in Saudi Arabia, the largest market for sharia-compliant insurance products.

There are some hybrid models in Malaysia and elsewhere, which combine elements of both.

Previous launches into this market in the UK have focused on motor insurance with Salaam Halal, led by CEO Bradley Brandon-Cross, being the most high profile.

This launched as a fully authorised insurer in mid-2008. Salaam Halal’s parent company Principle Insurance Holdings raised £60m from investors across the Middle East and Malaysia when it was launched. Brandon-Cross said the company had originally hoped to raise £80m, meaning it was left with a shortfall.

“We spent a lot of money on marketing and we were starting to build up a decent policyholder base but we needed more capital. With UK funding very hard to get, we went back to non-UK sources and they just weren’t forthcoming.”

Salaam Halal closed for new business 18 months after its launch and despite a brief attempt to revive it in early 2010, it finally ceased trading in the middle of that year.

Brandon-Cross says he believes there is a market although he is not currently involved in it: “There is a market there but we need to work hard at it”.

He highlights the need to give people confidence in the extent of the compliance with sharia law. This is done through having Islamic scholars on the board as only Malaysia has a central certification scheme.

“The quality of the Islamic scholars is important and the correctness of the model is important. If you do not pay attention to this, then smarter people will look underneath the bonnet and if anything doesn’t look right, it soon gets out there.”

This is a key element of the Insure Halal pitch and it has included three sharia scholars on its board. At its launch, CEO Faizal Karbani was confident this approach would work: “This is an important milestone in the UK. Insurance is a necessity and Muslims like everyone else need to protect themselves and their families. It is important that they can do this without compromising their faith.”

By focusing initially on classes of insurance that are not legal requirements, Insure Halal is adopting a different approach to its failed predecessors. Whether it has deep enough pockets to build a sustainable client base, only time will tell.

* After this feature was published, Halal Insure gave us an interview with its CEO Faizal Karbani, which you can read here

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