GCC insurance markets are still underdeveloped despite the relatively recent rise of takaful, a type of Islamic insurance wherein members contribute money into a pooling system in order to guarantee each other against loss or damage.  Conventional insurance is incompatible with Islamic law because of Sharia’s prohibitions on transactions inherently founded on uncertainty/elements of luck.  Moreover, conventional insurers store money in interest-bearing investments, which are similarly prohibited.  In the face of increased wealth–Accenture, a consultancy, forecasts that household Islamic savings will amount to $24bn a year by 2020–analysts posit that the global takaful industry will grow by 20% and reach US$10-15 billion within the next decade, led mainly by the GCC countries and Malaysia.  Per Ernst & Young’s inaugural World Takaful Report 2008, accepted contributions are expected to rise to more than $4.3 billion in 2010.

Two further developments should provide a catalyst to the industry.  One, a proposed law to mandate the use of the still nascent “re-takaful market” should help fuel its development, in turn boosting the underlying takaful industry as well.  Second, the expected passage of a GCC-wide insurance law will ensure compliance with international standards through the automation of underwriting, per consultancy A.T. Kearney, a practice it argues would improve insurers’ loss ratios, and also decrease the intermediation costs–thus making processes cost effective:

“In the UAE insurers cede more than 50% of their insured premiums to reinsurers with an obvious impact on their bottom line, as risk and profit is shared with the reinsurer.  In comparison international benchmarks show that reinsurance is only 5-15% for global leaders with state of the art in-house underwriting operations.  The companies that get underwriting right can hence look at exactly which segments require reinsurance and which are better kept within the company.  It is however vital to get the underwriting process in place first so risk/premium profiles are optimized.  Currently some segments (corporate mainly) have premiums which vary up to three times for the same risk.  This can negatively impact competitiveness of insurers if premiums are above market evaluation or negatively impact bottom-line and risk profile of the insurer if too much risk is attracted at too low premiums.”

Continued Cyril Garbois, Principal, A.T. Kearney Middle East, “the [insurance] market is currently underpenetrated and the size of the prize remains significant – we estimate that insurance companies regionally can improve profitability with 20-30% while at the same time increasing market share if they get underwriting right.  I believe the use of international best practices in underwriting along with the required level of sophistication in distribution is a key to driving future growth of the insurance market regionally.”

Such a move could bolster insurers’ balance sheets even in the event of prolonged economic slowdown reverberating from the credit crisis, which causes a reduction in new policies and also a larger cancellation of existing ones.  It’s perhaps with this relatively rosy future in mind that insurance stocks in Kuwait, for instance, showed resilience in November by dropping only 1% while the broader market shed 5.48% during a one-week span that saw the country’s broad index fall to a seven-month low on the 15th.

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