How would you describe the level of competition of local Islamic insurance companies? How competitive is Abu Dhabi regionally as an Islamic financial services hub? How have recent events in the region impacted the financial industries and how will this play out for Abu Dhabi?
ABDEEN: The level of competition of Takaful companies in the UAE market cannot be distinguished from the conventional insurers. Takaful is a segmented industry, so they can look at any business to provide insurance services. At this stage, as there is a surplus of capacity in the market, there are many players in the insurance market so competition is severe and in some cases, rates are much below the technical rate. This is a worrying sign because this eventually could undermine the financial status of certain companies and we have seen that in company results from 2010. The market in my opinion is saturated. Pursuing some form of mergers and acquisitions should be encouraged. This will make entities stronger in terms of what products they can provide and in terms of the service they can provide corporate and individual customers. The steps taken by the authorities of increasing the capital, which has to be implemented from 2012, to AED 200m is a step in the right direction.
It is evident that the political changes in certain countries will have an impact on the financial centres in the region. However, Bahrain has started a major financial sector. In both banking and insurance, they have good regulations and practices in place, which have helped Bahrain become one of the major financial centres of the region. This will contribute to the rise of these sectors in the UAE, but this is not the main reason these sectors have been successful in the UAE. The investment made in Dubai and Abu Dhabi will attract more foreign investors in the financial sectors, which will include insurance.
The Islamic Financial Services Board believes that there is a need for greater convergence between Islamic financial service centres. To what extent would you agree with this?
ABDEEN: Looking at the Takaful industry, it is still nascent. Multinational companies have seen a great potential in the Takaful industry and many of these companies have established a Takaful window or Takaful operations. Regional and local investors have also taken up with the Takaful industry. Anything new will find differences between authorities and regulators in various countries. The UAE has been a pioneer by enacting a separate set of laws for Takaful and this will contribute significantly in organizing this industry. We still have many approaches. Many countries deal with Takaful as part of the insurance rules and regulations, or commercial law and that is the status quo. Differences at one stage do bring creativity. But eventually, it will be useful for regulators, especially in certain regions, to talk to each other and try to bring harmony because this will widen the scope for the Takaful industry to progress. We still have time to reach that point and many countries are moving towards that.
How much risk exposure do you reinsure on international markets? To what extent is the Takaful reinsurance market adequately capitalized? Are Takaful reinsurers adequately capitalized today? How much do Takaful companies still rely on traditional reinsurance?
ABDEEN: The capacity any market can provide is important to the success of that market. In general, whether Takaful or conventional, we have witnessed in the last 6 years, many multinational players establish offices and branches in the region. This has increased the risk capacity of the region. We have seen a good number of local players increasing their capacity and increasing their retention and that was not limited to conventional insurance, but also in Takaful. Now we have re-Takaful companies based in the Middle East or based in South East Asia, and all of this has increased the capacity of risk taking, which is an important part of the success of any region trying to become a hub for insurance and reinsurance. As far as the Takaful industry is concerned, there is a drive now and there is investment by the local companies to increase their retention. On the reinsurance side, there are large multinational companies that are increasing their presence here. The Takaful industry is still reinsured with some conventional insurance, but we are not too far from a system that is A to Z Takaful.
To what extent has economic growth been matched by an equivalent growth in insurance coverage? What factors may be holding back the development of the Takaful industry in the UAE?
ABDEEN: Insurance in general is an umbrella of the economy and it goes hand in hand with the economy. Whenever we see growth or expansion of the economy, the umbrella grows to protect the economy. If we talk specifically about the UAE and Abu Dhabi, we have witnessed growth in certain sectors on the infrastructure side and on certain investments. With the unique types on investments that have come from Masdar and the Economic Vision 2030, the insurance industry has had to provide new and innovative products and new special types of coverage. There are certain covers such as PI (Professional Indemnity) which are adding more business opportunities for insurance. In banking, there is more development of bancassurance, which is being regulated. So I would say the growth and movement in Abu Dhabi is being followed by the insurance industry. However, the severe competition might mask some of the growth in the industry because of the huge reduction of the rates.
How do you see the penetration rate for insurance products evolving over the medium term?
ABDEEN: In general, the penetration rates in the Middle East, as compared to other countries in the West, are very low. In my opinion, that creates an opportunity. For example, group life and individual life are severely underinsured in our region. There is a lack of awareness of many aspects of insurance in the region today. In that sense, life is a great potential. There is also potential in specialized lines like PI, D&O (Directors and Officers Liability Insurance) and other protection to financial services. In general, the Middle East’ population is a young population. More than 60% is less than 30 years old. The concern of any parent is to provide a good life and an education for their kids. That on its own will trigger people to get some protection for their families.
Insurance in general is an umbrella of the economy and it goes hand in hand with the economy. Whenever we see growth or expansion of the economy, the umbrella grows to protect the economy...I would say the growth and movement in Abu Dhabi is being followed by the insurance industry.
Is the share price of Abu Dhabi National Takaful (TKFL) fair? How has regional tension impacted markets in the UAE? What needs to be done to further develop the regions nascent exchanges?
ABDEEN: As part of the global crisis, Dubai was at one stage receiving some negative publicity on real estate. But as a whole country, they have managed to salvage the situation in a pretty quick amount of time. That has reflected positively on the rating and the credibility of the UAE. The infrastructure investment that was made here will continue to yield results as the country is still attractive to foreign investment. Share price is an issue of perception and in my opinion secondary share prices are more the result of people and traders than the real value of the company. I look at the first market and not the secondary market. If you look at the share prices of some of the local companies, in many cases they are a multiple of the share prices of what they were when they were established and that in my opinion is a positive sign. I would concentrate on the actual operational efficiency and profitability of companies. The stock market is not the main measurement of a company.
What would you say to encourage fund managers and investors to invest in TKFL?
ABDEEN: I believe Takaful has many of the elements of a mutual fund. In my opinion, the Takaful concept is attractive to investors and insurance buyers because the distinction between the shareholders of the company and the policyholders of the company makes it a unique concept. The investors of the company will get management fees and that is interrelated to how much the management increased the portfolio. The policyholders on the other hand will be the owners of that portfolio. So after deducting claims and reinsurance and the management fees, they are also entitled to the surplus. Therefore, it is a win-win situation where there is a value-add for the policyholders and for the investors. We can offer to a wide range of companies and we are winning accounts from conventional companies. We are not restricted in any way. The indicators of success of any company are the return on capital and return on equity. If I want to speak about Abu Dhabi National Takaful, in a difficult market, in a difficult year, we achieved a 29% return on capital and a 20% return on equity in 2010. In my opinion, that shows the Takaful concept has appeal to a wide segment.