Islamic insurance: world first for London

Kuwaiti-based GNL has become ‘the world’s first Shariah-compliant insurance broker offering premium takaful and re-takaful commercial risk solutions in the UK capital’. In this exclusive report, MUSHTAK PARKER charts the background and reveals the future

Can you imagine a priest or rabbi encouraging a financial institution to engineer a specific product to fill the need of a potentially huge gap in the market? Well, something similar has happened in Islamic insurance, or takaful, when a prominent Shariah adviser to one London-based Shariah-compliant wholesale bank some three years ago exhorted the institution to develop a brokerage platform of takaful capacity. The idea was that this would cover risks in commercial transactions ranging from trade finance, letters of credit guarantees, real estate financing, project finance and, of course, supply capacity for reinsurance (re-takaful).The Shariah scholars have effectively become the drivers of commercial and credit risk takaful which is grossly under-utilised or, in some markets, virtually non-existent.
With the official launch of Kuwaiti-backed GNL in early July 2011 in London that entity has become a reality, with the promoters claiming that it is “the world’s first Shariah-compliant insurance broker offering premium takaful and re-takaful commercial risk solutions in London”. Given its long history and primacy in insurance, London in this respect is in a strong position to become the real hub for commercial and credit risk takaful.
If one looks at all the latest takaful statistics, whether from regulators such as Bank Negara Malaysia, the takaful regulator, or industry reports such as the ernst & Young 2011 Takaful report, the one component that is conspicuous with its absence is commercial risk and credit takaful.
The nascent takaful industry comprises largely family takaful (akin to life insurance) and general takaful (motor, marine, fire insurance). The Malaysian takaful industry, according to the Bank negara Malaysia 2010 annual Takaful statistics, experienced a compound average growth rate of 27 per cent in terms of net contributions between 2005-2010, with family takaful driving the growth at 28 per cent for the same period, to dominate more than 80 per cent of the total takaful market in 2010.
Bank negara Malaysia deputy governor Mohd razif abd Kadir in a recent speech in Kuala Lumpur emphasised that the transformation of Malaysia as a high-income economy, similarly, presents opportunities especially as Islamic finance has specifically been identified as one of the new growth areas under this new economic model. In this respect, the takaful industry stands to gain from this socio-economic transformation by seizing the opportunity to grow business beyond the more traditional business lines.

In contrast, family takaful remains a small line of business in the Mena region, taking a five per cent market share in 2010, according to the 2011 World Takaful report by ernst & Young. This figure may grow given that compulsory medical insurance requirements in saudi arabia and in other GCC countries is contributing to growth in that field.

The report projects that the global takaful industry is on course to reach $12bn in 2011, which is extremely modest compared to the conventional insurance industry and suggests a potentially huge under-utilised capacity for takaful.

Gross takaful contributions for the GCC in 2011 are forecast to reach $8,330m despite an economic slowdown in the region.
Ask any insurance or takaful experts to estimate the potential of the global market for commercial and credit risk takaful and they become very coy, fearing that what they say may be over-optimistic or grossly understated.

Sohail Jaffer, partner, International Business development, at the Luxembourg branch of FWU aG International, the German insurance and takaful solutions provider, for instance, sees “tremendous potential for trade, project and sukuk related takaful, especially for trade and sukuk”. But he concedes that “few takaful operators provide shariah-compliant insurance for trade, project finance and sukuk. hence conventional insurance is more prevalent.”
There are snippets of shariah-compliant commercial risk protection plans offered by financial institutions in the Mena region, but these remain the exception rather than the rule. saBB Takaful, part of the hsBC Group, for instance, offers a Marine Cargo Takaful Plan, which provides tailored solutions for a client’s cargo movement protection needs in conjunction with saBB amanah Trade Finance solutions.

The potential for trade-related takaful is mind-boggling given that the total trade of the 56 IDB member countries in 2009 amounted to $3.374 trillion

The potential for trade-related takaful is mindboggling given that the total trade of the 56 IdB member countries in 2009 amounted to $3.374 trillion. There is no reliable data or estimate of how much of this direction of trade is actually insured, whether conventionally or through takaful.
The outlook for the sukuk market in 2011 through to 2012 is positive especially as the economies of the IdB member countries recover and high crude oil prices help to revive the market. The volume of sukuk issuance in 2011 is projected by the CIMB Group to grow by 29 per cent in 2011 compared with 2010 to reach $22bn. The upswing in corporate spending, an increase in issuers seeking funding diversification and improving investor sentiment in the Gulf are also expected to fuel the sukuk market globally.

Saudi arabia, Malaysia and Qatar have announced plans to spend $1 trillion on development projects throughout the next decade and at least $3.9bn of sukuk sales announced this year will fund the construction of oil refineries, steel mills and petrochemical plants. all these developments augur well for for takaful opportunities, liquidity generation and also product innovation.

In this respect, ICIEC’s plan to launch an LC Guarantee Fund and a sukuk Guarantee Fund, according to FWU’s sohail Jaffer is “definitely a step in the right direction but it needs to focus on source of trade flows, including Trade Industry Boards and issuers of sukuk”.

One example of how far takaful still needs to travel to overcome the challenges of closing the gaps of potentially huge business opportunities is the contract of reinsurance signed recently by the World Bank’s Multilateral Investment Guarantee agency (MIGA) and the Islamic Corporation for the Insurance of export Credit and Investment (ICIEC), the standalone entity of the Islamic development Bank (IDB) Group, for the €222.6m Kadikoy-Kartal-Kaynarca Metro Project in Istanbul, Turkey, of which MIGa is the primary insurer.
According to ICIeC, MIGa is providing insurance cover against the risk of non-honouring of sovereign Financial Obligations (NHSFO) by the Municipality of Istanbul to cover the banks’ financing for a period of nine-and-a-half years. In turn, ICIEC is providing €15m reinsurance support to MIGA.

While ICIEC is providing the reinsurance through re-takaful, the ultimate backing for the reinsurance, according to richard Bishop, CeO of GnL, is conventional insurance. “Takaful and re-takaful all put their large risks through the conventional market. What we want to do is to make the entire process on a shariah-compliant basis. What we are saying is that we are going to bring for the first time ever capacity and the whole cycle in a shariah-compliant way. The issue is that in the takaful documentation at the moment the underlying insurance is not Shariah-compliant. It is conventional. We will bring in a Shariahcompliant conventional capacity.” GNL pre-tested its ideas to its closest clients and has actually sold a number of products to a limited number of clients in the GCC and East Asia.

Another challenge is the assets to back insurance. The largest Middle East Sovereign Wealth Fund (SWF), Abu Dhabi Investment Authority (AD IA) has estimated assets under management of some $750bn, followed by the Saudi Arabian Monetary Agency (SA MA’s) foreign reserves of about $450bn.

In the West, says James Bagshawe, chief operating officer of Gatehouse Bank, one of the five Shariah-compliant banks authorised by the UK’s Financial Services Authority (FSA ), the assets that back insurance such as pension funds and so on run into the many trillions of dollars.
“What the West has is the actual balance sheet of a country and the assets and funds to support it, which runs into many trillions of dollars. The consequence is that there is a lot of capital in the West available for long-term investment, particularly from pension funds and insurance companies. London is the centre of understanding the backing to set up an insurance company,” added Bagshawe, whose own family has a long history of involvement in the insurance industry.

Takaful and insurance industry experts agree that the reasons as to why the Islamic finance industry seems to have neglected this connectivity between commodity Murabaha or istisna or any other such transactions and takaful include the limited expertise of takaful operators; the endemic under-capitalisation of takaful companies; and the short-termism of shareholders of takaful companies, who are merely interested in “extracting money out of the company all the time”. In reality, there ought to be a natural fit between commercial activity and insurance.
“Insurance is a long-term business,” explained Bagshawe. “You have to take a much longer view on insurance for it to bear fruit. Those companies that get it right will have good prospects for many years. Takaful on the other hand takes a short-term view. Not surprisingly, not many takaful companies have issued a profit distribution because of the nature of the cross charges of the policies. Because of short-term money there is a need to take it out as soon as possible for shareholders rather than for the benefit of the company. You cannot build an insurance company on the back of short-term money.”

Others say that takaful companies should stop operating as venture capitalists and start putting in some long-term money. If that happened there would be no reason why this couldn’t benefit a market such as the UK, which would then have a much stronger takaful proposition to offer.
Similarly, the impact of low capitalisation is that most takaful companies end up selling products that are either of low limit of sum insured or risk.
Others make the point that the Islamic finance industry has found it too easy to do it through the conventional insurance route. In this respect, the industry and the banks tend to be inward-looking and insular.

Insurance experts such as GNL’s Richard Bishop are sanguine about the impact of the “Arab Spring” on the takaful market. “All conf licts bring opportunity and it does not matter whether in the Middle East or in Northern Ireland or the Far East. At the moment, there is an opportunity in Europe because of what is going on in the Middle East, from where we are seeing capital flight into the safety of Europe. Capital will buy assets and for those assets we would like to provide takaful cover. Eventually the situation will stabilise and some of that money that came out will go back again. And when it does that it will buy assets in the GCC, which in turn will need protection.”

However, Bishop emphasised that the GNL platform is effectively a global one. That is what London is about. His hope is that London will become the natural home of takaful to complement its long history in insurance. Similarly, London has a level of experience and capacity that does not exist anywhere else in the world. But, ultimately, there will have to be support from both sides of the equation – the insurance providers in London and the buyers that would want to turn to London.

In terms of regulation, tax neutrality, insolvency rules, claims etc, London is best positioned for insurance and this will be the same for takaful. London at the same time also has an opportunity to create a standard documentation for commercial and credit risk takaful, effectively a Takaful Standard akin to an Insurance Standard based on English law, which is the preferred legal jurisdiction for most cross-border Islamic financial transactions and which even the Shariah scholars agree with.

GNL is concentrating on the large commercial sophisticated buyer of insurance products rather than the individual population. In London it can also provide the reinsurance support for the local market, which is what London has done for almost three centuries. “We feel local markets are not sophisticated enough to deal with large commercial risks. When we talk to the local takaful companies in the Middle East they recognise that they are not yet sophisticated enough to reach the level to underwrite such risks,” explained Bishop.

London has taken a lead in Islamic finance in the West because of its legal and financial engineering expertise and the fact that it is a centre of knowledge. However, he warns against complacency and says that London has ignored the Islamic insurance question, and the takaful world in general has appeared to concentrate on their individual domestic markets. That does not mean there is not the demand from the Islamic financial institutions of the world for insurance protection products for commercial and credit risk. That is one of the reasons why GNL was established and it is targeting some 250 such institutions as potential business.

“The takaful capacity that we have developed is for recognised commercial risk – large real estate risk, large construction projects, large financial institution exposures, those are the areas where the purchasers are fairly well educated because they all employ Shariah boards that are encouraging them to look at these activities,” explained Bishop.

One of the reasons why Islamic finance has taken hold in some parts of the Western world such as the UK is because of an inherent misunderstanding of what Islamic finance stands for and the potential role insurance can play. GNL executives had to explain to the conventional insurance market that there is a great opportunity here to rethink and structure to address the needs that have been expressed by the many institutions through their scholars.

Bishop is confident that takaful is inclusive and for all irrespective of religion or creed. “One of the things I have been talking to colleagues about is to develop products relating to exposures of private medical and health companies. In the Middle East, like elsewhere, a doctor is a doctor no matter whether he is Muslim or non-Muslim. He still has malpractice exposure. If we sell a takaful product to a Muslim doctor who prefers this, why can’t I sell that same product to a non-Muslim doctor who is faced with the same risks and claims. There is no reason why I can’t. Provided the cover and documentation is correct it does not matter that it is sold by a company that calls itself takaful instead of insurance,” he explains.
As such the importance of creating market awareness and educating clients about commercial and credit risk insurance is imperative. Some like FWU’s Sohail Jaffer would like industry institutions such as the IDB, the Islamic Financial Services Board and their global partners such as the World Bank and the Asian Development Bank to take a lead in this.

Others say that market education should be a three-pronged effort – the need to educate the Shariah advisories about the importance of commercial and credit risk insurance; they in turn will educate their clients – the financial institutions and the insurance companies; and the need to educate the conventional insurance industry, which has the underlying capacity and assets to offer a comprehensive Shariah-compliant solution.  In effect, this is what GNL is aspiring to achieve and is willing to accommodate partners and participants from all over the Islamic finance and takaful world.