The nascent Islamic insurance industry is poised to gain market share

In 2013 and the first half of 2014, Oman’s takaful (Islamic insurance) segment moved to the forefront of the wider insurance industry. While sharia-compliant financial products have been allowed in the country since 2011, sharia-compliant underwriting was officially sanctioned only in 2013, and the first takaful firms did not begin the process of setting up shop until later that year. As of mid-September 2014 two takaful firms were operating in Oman, namely Al Madina Takaful, which opened its doors as an Islamic insurance provider in January 2014, and Takaful Oman Insurance, which launched in June 2014. Oman United Insurance, a conventional underwriter, obtained a provisional licence to set up an Islamic takaful subsidiary in late 2013, but, at time of publication, had yet to move forward with this initiative.

“Islamic banks have taken the lead on Islamic financial services, and takaful has the potential to play a major role in the market,” Gautam Datta, the CEO of Al Madina Takaful, told OBG. “The concept is still new to Oman, so we are still experiencing growing pains.”

Enabling Legislation

In 2011 the Central Bank of Oman (CBO) released new legislation allowing for the establishment of a domestic Islamic finance industry. Prior to this issuance, Oman was one of only a handful of countries in the Gulf region and wider Middle East that did not allow sharia-compliant financial products. In the three years since the CBO’s announcement, the segment has seen a flurry of activity.

In addition to the establishment of two new fully fledged sharia-compliant banks, almost all of the sultanate’s conventional lenders have opened Islamic affiliates of their own (see Banking chapter). Similarly, Oman’s capital markets sector has seen significant interest in Islamic products and services, with the Muscat Securities Market (MSM), the stock exchange, going so far as to launch an Islamic index to track sharia-compliant instruments in July 2013. Sukuk (Islamic bonds), for example, are increasingly considered to be a key potential future source of financing for local corporations and the government alike. Indeed, as of mid-2014 both the state and Bank Muscat, Oman’s largest lender, were reportedly planning to issue tranches of sharia-compliant debt before the end of the year (see Capital Markets chapter).

Rules & Regulations 

While takaful has technically been allowed in Oman since the introduction of the CBO’s 2011 Islamic Banking Regulatory Framework (IBRF), which included a series of brief provisions aimed at Islamic insurance, the sector’s development did not begin in earnest until 2013, when the Capital Market Authority (CMA), which is responsible for regulating the insurance industry, published a new legislative framework for takaful. Under the CMA’s law, sharia-compliant policies cannot be sold alongside conventional coverage; takaful firms must hold minimum paid-up capital of OR10m ($25.9m); and providers are required to list shares on the MSM. These last two requirements are in line with regulations governing the broader conventional insurance sector (see analysis). Under the CMA law, foreign assets cannot account for more than 25% of an Islamic insurance firm’s total investments, and fixed-income instruments cannot account for more than 10%. Due to a widespread lack of sharia-compliant investment opportunities in the sultanate as of yet, the CMA has been fairly flexible on these rules, though it is expected to tighten up enforcement in the future.

Al Madina Takaful 

Al Madina Takaful began operations as Al Madina Insurance in 2005. “We launched as a conventional insurer, but the original intent of the shareholders was always to be a takaful company as soon as the environment allowed it,” said Datta. “For the first six years of our life we worked as a conventional firm but in a takaful spirit. Our investments were made in a sharia-compliant manner, and our founder shareholders accepted lower investment returns to ensure the firm’s sharia compliance.” When the CBO’s IBRF came into effect, Al Madina launched a company-wide restructuring effort, began educating its clients on the benefits of Islamic insurance and applied for a takaful licence. The company’s application was approved by the CMA in early 2013, on the condition that Al Madina list publicly and that it had to meet the newly established minimum capital requirement of OR10m ($25.9m).

In November 2013 Al Madina launched an initial public offering (IPO) on the MSM, selling 66.67m shares at a price of OR0.14 ($0.36) each, which was equal to 40% of the total value of the firm. The listing, which raised OR36.6m ($94.8m) for Al Madina, was oversubscribed nearly four times. Al Madina Takaful began trading on the capital market on January 1, 2014.

According to Datta, as of mid-2014 the firm’s client base was mostly made up of corporate policyholders, though the company was investing on the retail side as well. “We had the advantage of six years of operation on the conventional side, which allowed us to build up our corporate and retail customer base,” he told OBG. “We are seeing rapid growth on the retail side, partly driven by our newly sharia-compliant status.” Many Omanis are attracted to takaful for religious reasons, while corporates tend to choose coverage based on cost and other financial issues. “On the corporate side we have to compete on cost and services, just like the conventional firms,” said Datta. “We cannot rely on our Islamic status to win new customers.” Al Madina offers coverage including motor, marine, engineering, general accident, liability, fire and property, as well as life and medical coverage.

Takaful Oman 

While it did not begin operations until mid-2014, Takaful Oman carried out an IPO for 40% of its shares alongside Al Madina in November 2013. The firm, which was established by a handful of regional players, issued 40m shares during the listing, raising OR22m-23m ($57m-59.6m). The IPO was oversubscribed four times among retail investors and seven times among institutional investors. The founding shareholders of Takaful Oman – namely Kuwait’s T’azur Takaful Insurance, the Oman National Investment Corporation, the National Investment Funds Company, the Oman Investment Corporation, the National Bank of Oman, Bank Muscat and Blue Door Investment Services – control the remaining 60% of the firm. Like Al Madina, the company offers a variety of products, including life and health, property, motor, fire, engineering, and marine, among others.

Takaful Oman plans to build its business through a branch and agency network, and also via products offered for sale at banks, in an arrangement known as bancassurance. According to statements released by Takaful Oman, the company is aiming to be profitable by the end of its first year of operation, and it plans to distribute dividends on a regular basis beginning in its fourth year of operation. Within five years the company is aiming to have gained a total insurance market share of around 4%. While it launched with a staff of around 30, the firm plans to hire up to 50 additional employees by the end of the first year.

Uptake & Competition 

While it remains unclear if the local market will support Takaful Oman’s growth plan, as of mid-2014 it was clear that there was a considerable amount of interest in takaful products among the domestic population. At the time of publication it was too early to tell what sort of impact the launch of Al Madina and Takaful Oman were having on the market as a whole. However, based on anecdotal reports both firms have seen rapid uptake.

“In 2014 so far our growth has been much higher than initially expected,” Datta told OBG in late August. “Part of this is obviously the takaful factor – a lot of people are coming to us specifically because we are an Islamic insurance company.” As a result of converting its conventional business to takaful products and services, Al Madina now controls around 5% of the overall insurance market, which gives it a leg up in the growing sharia-compliant segment.

Al Madina’s status as market leader could be challenged by Oman United Insurance, which announced its plans to launch an Islamic-compliant subsidiary in 2013. The company is currently one of the five largest conventional insurance companies in the sultanate, with an overall market share of around 11%. In the meantime, both Al Madina and Takaful Oman are doing everything they can to raise their profiles and attract new customers. Both companies have invested in building awareness among the population. These efforts have consisted of public workshops and advertisements that highlight the differences between takaful and conventional insurance. Given the large percentage of local insurance markets controlled by takaful firms in neighbouring countries – from 16% in Kuwait and the UAE to 100% in Saudi Arabia – Oman’s Islamic insurance players are looking forward to a large medium- to long-term upside. At the same time, local takaful firms have studied providers in nearby markets in an effort to streamline their own development process. “There are a lot of lessons to be learned from GCC countries and their struggles with takaful,” Datta told OBG. “Taking those are important, but Oman needs to find its own niche as well.”