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Demographic changes in Islamic countries create growth potential for Re/Takaful operators

Historically, insurance has not been popular in Islamic countries. Demographic change and other societal transformations are, however, creating market opportunities for Takaful.

Demographic trends in Islamic countries

The world’s 1.57 billion Muslims, spread over about 300 ethnic groups and many countries, make up a culturally and socially highly diversified group accounting for 23% of the global population. Until recently the birth rate in all Muslim-majority countries was high, but while it remains so in the poorer countries it has fallen sharply in others — to below replacement level in certain cases. Most Islamic countries have a high percentage of young people in their populations, but life expectancy is increasing and this, combined with falling birth rates, will lead to rapid ageing of populations after 2030. Overall, they are experiencing demographic transition in the same direction as other countries, but the rates of change vary greatly.

The longevity risk

According to UN projections, life expectancy in Islamic countries is rapidly converging to the levels in developed countries, and the proportion of elderly (65 and over) in the populations is rising more rapidly than has been the case in the developed world. Throughout the world, demographic pressure influences state pension schemes, and employers’ pension funds move to a defined contribution system with uncertain benefits. So the longevity risk implies a need for more savings, in whatever form, to cover a longer period of retirement. Insurance companies have developed products to address longevity risk, such as life annuities and long-term care insurance.

Market conditions

Conventional insurance is unacceptable according to the Shari ‘a (Islamic law) as it contains elements such as uncertainty and interest impermissible in Islam, the general Takaful (non-life insurance) and family Takaful (life insurance) forms are in line with religious doctrine. Insurance penetration is much lower in Islamic countries than in the mature markets, but it is far higher in South East Asia, especially Malaysia, than in the Middle East. In certain countries, including the United Arab Emirates, Iran, Egypt and Bahrain, life insurance is almost non-existent.

The Malaysian market

The Malaysian market to some extent reflects the realities of other Muslim-majority countries. Malaysia will face some of the same demographic difficulties confronting the western countries. It still has a young population with 50% below the age of 25, but the below-15 age group is diminishing while the over-65 group is steadily increasing. The Malaysian state pension scheme is insufficient to meet the growing needs.

Healthcare is a further area of opportunity. A good national health service is provided by the state, but in a changing socio-economic landscape with a growing middle class population, Malaysians are increasingly requesting private healthcare insurance, and medical Takaful is expected to grow strongly. The challenge for the insurance and Takaful sector is to increase awareness and seize opportunities associated with retirement cover and healthcare.

Published 18 April 2011

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