Developing Markets - Meeting Demand - Delivering Capacity

World Takaful Summit - Dubai - 9th April 2018
Speech by Dave Matcham - CEO, IUA and Executive Committee Member, IIAL


It is a pleasure to once again attend and speak at your annual conference. Distinguished ladies and gentleman, I am honoured to be given the same key note opportunity as the distinguished speakers before coffee. The London market has a long history of providing solutions for the MENA region.  Indeed, your conference theme of differentiation, innovation and growth speaks to the heart of London’s success and centuries of trading.  Events such as these are irresistible to maintain contacts, explain further London’s potential and develop new partnerships.  Today I will concentrate on Takaful opportunities. 

Not privy to Milliman research 2017, UAE 16.7% topline growth and bottom line growth.  My research for this speech did not initially fill me with joy. It seems that the global re-Takaful market has suffered from poor quality business underwriting intrinsically linked to the underperformance of the primary Takaful sector.  This has led to capital erosion for Islamic reinsurers and the eventual downgrade of creditworthiness.

2017   2016
935 – 105% combined ratio (mostly personal lines)

Similar to UK conventional

London commercial combined ratio way over 100%.

According to Mahesh Mistry and Aneela Mather-Khan, analysts at AM Best “The sustainability of the re-Takaful model is likely to be tested over the coming years and it remains debatable whether it can be seen as a viable alternative to conventional reinsurance over the longer term”. This sentiment seemed to be contrary to the more positive indications from London. 

Or even this headline “Takaful: Relevant and Resilient”. Indeed, it was noted that some re-Takaful operators, particularly those from Africa, are bucking the trend of negative earnings. 

UAE – 2017 – good year – sustainability is the key, jury is out. When looking at the London market, we, of course have our own challenges – jury definitely deliberating in London firms, e.g. adverse results from a severe natural catastrophe season, poor investment conditions and impacts of Brexit, indeed as we enter the last year of full EU membership, the London market and UK Government are working in partnership to explore new growth opportunities. You can be assured that this discussion includes providing commercial insurance products in a Shariah compliant manner thereby complementing the Government’s engagement with Islamic banks and business enterprises. The London market is ready, willing and able to serve the demands of Islamic interests to share commercial risk.

First, a brief profile of the value of the London Insurance Market;

 The London Market is responsible for US$90 billion (re)insurance business, via over 350 firms and with business derived from over 200 countries.

• The Market is bigger than all its nearest rivals combined - Zurich, Bermuda and Singapore - and has over 60% of the global aviation market share, 52% of the energy markets, and over one third of the marine market. You will all know that the unique selling point of London is its expertise in specialist risks and ability to innovate

• Currently no market in the world can offer the capital and expertise required to cover so many of the complex risks involved in aviation, marine, satellite communications, ship building, nuclear power and energy infrastructure, deep sea cabling and tunnelling.

• Our market is underpinned by robust and respected prudential and conduct regulation (no tariffs), a rule of contract law trusted and used extensively on commercial contracts and centuries of jurisprudence offering certainty and fairness to contracting parties.

• Two pieces of recent authoritative research echo our qualities, namely (City of London Corporation) show that London is ranked first globally for talent in financial services and the top European City for business. It has also retained its top position in the annual ranking of the World’s leading financial centres fighting off stiff competition from New York and Asian cities (Z/Yen Think tank). 

London represents itself in many ways. It expresses its views through mature trade associations, globally recognised firms and via an overarching strategic group called the London market group

• The LMG is the representative body of the specialty commercial insurance industry in London and speaks collectively for all market practitioners.  Four key trade associations support LMG’s work, namely: the International Underwriting Association of London (IUA), Lloyd’s of London, the Lloyd’s Market Association (LMA) and the London & International Insurance Brokers’ Association (LIIBA). 

• Together we represent over 26% of the City of London’s total income, controlling over US$90 billion of gross written premium and employing 52,000 people not only in London but also across the UK.

Promoting the London Insurance Market

• In October 2017, the London Market Group launched London Makes It Possible, a campaign designed to promote London’s role as the world’s preeminent insurance hub and remind companies around the world about the range of risks that can be covered in London and the vast ecosystem of talent, capital and expertise, which supports it.

• London can never stand still and rest on its laurels therefore moving forward LMG plans to promote this campaign in key target markets, and it will form an important part of our efforts to attract new investment from those markets post-Brexit.

Now let me look at specifically at our work in representing Islamic Interests and thank Abdulla Mohammed Al Awar for positive reference to open approach by UK Government.

• The City of London continually promotes itself as an Islamic financial centre. This campaign is very successful, indeed outside this region and Asia, London is the leading hub for the sector. It has five licensed, fully Shariah compliant banks and over twenty more offering some form of Islamic banking.

• According to the president of the Saudi Arabia based Islamic Development Bank, at a recent LSE conference, post Brexit, our position could be even stronger, “London has the necessary financial, regulatory and legal experts to develop the UK into a thriving hub for Islamic finance”.

• In the Fintech space (which will be covered later in the conference), Dubai and London are both well positioned and collaboration between the two markets will create bigger opportunities.

Takaful – The missing link

• This is all tremendous, but what of the insurance industry specifically. Most of my research concludes that the supply of commercial Shariah compliant insurance products (Takaful or Retakaful) does not even come close to matching the potential demand from the Islamic finance industry.

• This is why London formed the Islamic Insurance Association of London. There was no representative body for this nascent industry, no recognised standards, no education about this specialist product, no push for the development and supply of the product – in short no representative voice.

• This has changed materially. Over the last 3 years, working in partnership with UK Government who urged the market to form its own trade Association and business stakeholders, IIAL has conducted a series of activities to promote the supply, develop the business partnerships and draft the standards in conjunction with Takaful standards issued by the Islamic Financial Services Board. Opportunities such as this are seized upon to spread the good work of the association.

• The Association has conducted a number of educational initiatives which were essential for the London market to be ready, willing and able to respond to the growing demand.  We have held conferences in packed rooms with keynote speakers such as Lloyd’s CEO, Dame Inga Beale, senior UK Government Ministers and a London-based scholar.

• At our conference on 30 October last year, Baroness Rona Fairhead from the House of Lords, a Minister at the Department for International Trade, pledged UK Government support in positioning the London market as a global leader for Islamic insurance.  Her message quite simply was that “we in Government are here to help you”. 

• She added that she is determined to use the full force of her department and indeed Government to ensure the UK remains one of the most open jurisdictions for Shariah compliant investments in the World. She noted that London is already home to a strong bedrock of Islamic financial services expertise which gives a strong platform to expand into Takaful insurance. 

• Other key outputs from the Association have included a white paper which summarised a global survey of potential buyers of Islamic insurance. The aim of the survey was to examine what the market needs to do to become relevant to the Islamic clients of today and in doing so deliver the right products in the way those clients would like them to be delivered.

• The results highlighted opportunity and challenge in equal measure:

o 7 out of 10 of those questioned said they would buy Islamic insurance products if they were available for their risks;
o There was a clear demand for commercial specialty and reinsurance products;
o At present, just over one third of those who responded said they buy Islamic insurance creating a significant market for the sector;
o Price was cited as a barrier to purchase with almost half of those questioned saying that they felt they were not offered the option by their brokers when it came to placement or renewal discussions. 

• A general thread throughout the survey was that the industry needed to do more to communicate the availability of the capacity and its ability to match conventional covers. 

• The survey results are relevant, however a refresh seems important – these were 2016 findings and regulatory, FinTech developments may see different (better) results.

• One other product worth mentioning from the Association is a FAQ document which creates a permanent record of education as insurers seek to develop the Shariah compliant solutions.  I would urge you all to have a look at the IIAL website ( where all these documents can be found very easily.

• I should not forget our national training body, the Chartered Insurance Institute, which is globally recognised for quality education.  It now has available to students a module on Takaful in both English and Arabic. Best wishes to Mark Cooper – Lloyd’s Dubai in his exam next week.

Supply and Demand

• 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.  Support by Shariah boards and regulators could tip the sector back to safety.

• There also seems to be a growing frustration that Islamic investments are not met with available Islamic insurance capacity. 

• The London market now has up to ten commercial insurers offering Shariah compliant products. These can range from political risks insurance in regions of heightened tension to risk sharing mechanisms in major UK infrastructure projects backed by Islamic finance.

• Both company members of IUA and Lloyd’s syndicates are participating in this growing market. The specialist nature of the risks to be protected is matched by the product development expertise and strong balance sheets of the insurers.  It is fair to say however that real traction has not been achieved. 

• The supply side is therefore growing, but what of the demand. We often hear that brokers prefer not to offer a Shariah solution arguing that conventional products are cheaper and more suitable. The worry is that these comments are not made in the best interest of the client.

• Another important factor is the intense competition from the conventional market, which promotes itself as stronger, better rated than Takaful alternatives. This leads to conventional products chosen to obtain better client protection. London can help here, indeed its available Takaful capacity offers rating levels perfectly acceptable to commercial clients. 

• Despite these factors it is our belief that there is a growing demand for Shariah compliant products voiced by senior representatives of the clients, e.g. risk manager and/or advising scholar or the Board itself. I wonder whether the available supply and demand is somehow disconnected and this disconnect should be a subject for discussion by the scholars. If we are at a turning point, both the London supply side, and that existing globally, all must be ready to satisfy the new demand.

Looking ahead

• To my knowledge Pakistan is the only jurisdiction which requires Takaful operators to exclusively cede business to re-Takaful operators, and only cede risks to the conventional market if the re-Takaful market does not have sufficient capacity. London brokers are responding by seeking out the available Retakaful capacity in the London market for Pakistan clients.

• According to AM Best, most regulators and Shariah scholars have been reluctant to obligate primary Takaful operators to cede business to re-Takaful operations as a measure to protect policyholders.  This stance causes them to turn to strong creditworthy insurers (usually conventional players).

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.

AM Best added that “unless regulation and Shariah boards enforce the use of re-Takaful, the current re-Takaful model may be under threat over the long term, unless the model can be repositioned and seen to add additional value to the reinsurance market”.

• Underperformance of the Takaful sector aside, a major hurdle facing the Islamic reinsurance market is the absence of enabling measures, even a mandate requiring Islamic insurers to cede business where possible in a Shariah compliant manner.

• This push for an enablement, even a mandate or default setting to look for Takaful solutions first seems counter-intuitive for liberal free market economics.  Regulatory gift motor tariffs.  However, given that there should not material differences between the Takaful and conventional product, perhaps now is the time to nudge the market through enabling measures such as regulation or some form of client mandate? 

• With the education base established, IIAL is now in dialogue with representatives of the Islamic clients to seek accreditation for its newly developed standards to support the industry. We expect this discussion to be finalised later this year to lead to not only approval but also a positive determination by the scholars to encourage much more Sharia compliant purchasing in the commercial insurance market.

• London, indeed other key markets, needs to be ready for this development. London certainly can offer the security and client protection through its Shariah alternatives. This should give the necessary comfort to Sharia boards of primary Takaful operators and Islamic financiers. I fear that without a form of mandate, the market will not grow. Interestingly and for a totally different reason, the mandate option is also being used in London to drive/change/modernise electronic insurance trading.  This is being pursued by Lloyd’s with incentives for good behaviour and penalties for non-compliance, a so-called carrot and stick approach.  P/O wider TOM.  Also, mid-noughties – contract certainty mandate now BAU.

• Both IIAL and LMG will be engaging closely with UK Government to promote the product through the “London makes it possible” campaign and the facilitation of bilateral discussions. We are planning a signature conference to this effect in late November 2018.

This conference, entitled “Developing Markets, meeting demand, delivering capacity” speaks to heart of the Takaful product’s development in London. 

• Let me end with a quote from Dame Inga Beale, CEO Lloyd’s.  “It is incredibly important that we in the London Market continually review the products and services we offer our customers around the world, and the way we offer them.  Having the appetite and capability to provide Shariah-compliant risk products will ensure London remains relevant to all communities and will reinforce our position as a centre of innovation”.

Thank you.