Back in 2013, there was a great deal of speculation and optimism around the build out of the UK’s Islamic finance offering, with the then prime minister David Cameron stating the UK’s ambition to become an international centre to rival Kuala Lumpur and Dubai. Six years on, we have certainly made some tangible progress towards achieving Cameron’s ambition but, from an insurance perspective, we have a way to go.
A recent report by City UK on global trends in Islamic finance and the UK market puts the UK as the number one western centre for Islamic finance. Research by global property advisors the CBRE Group found that 44% of the US$13 billion invested by Middle East sovereign wealth funds and businesses went into London. This build out can be attributed, in part, to a number of important developments over the last few years, including a range of government policies which have created a fiscal and regulatory framework intended to support the market for Islamic finance products. The London Stock Exchange has also helped to move the dial by listing the first-ever UK Government Suku in 2014, subsequently followed by over 60 other issuances with a total value of over US$48 billion.
A key part of this was the ability to offer Islamic businesses insurance cover that complies with the principles of Shariah law. In 2015, the Islamic Insurance Association of London (IIAL) was set up to support the work of those in the UK (re)insurance market that wish to transact takaful business. In late 2018, the insurance market welcomed the IIAL’s principles covering Sharia-compliant insurance, which were launched in the Lloyd’s library by City Minister John Glen MP. They delivered a certainty to market practitioners and Islamic clients across the world that products being delivered in the UK meet with the strict requirements for compliant insurance and reinsurance.
Building on foundations
Despite having put strong foundations in place, the development of takaful insurance in the London market remains somewhat behind the curve. It was hoped that London would be able to provide the capacity for large commercial risks that local markets have not had the scale to underwrite. While it was predicted that the IIAL’s guiding principles would help attract business from the established takaful markets of the Middle East and Southeast Asia, this has not materialised as expected. It may be that there is a disconnect between supply and demand.
In terms of supply, the London market now has up to 10 commercial insurers offering Shariah compliant products. These can range from political risk 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.
However, it appears not to be matched by demand. For example, 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. Equally, there are no hard and fast rules stating that Islamic organisations must purchase takaful insurance, it is very much done on a best efforts’ basis. Potentially, if one high-profile Islamic player whose business is already placed in the London Market was to insist on a Sharia-compliant policy, others may follow suit. The question is: who is currently prepared to take the plunge?
It is also worth taking a moment to consider the opportunities outside the Muslim community. Ethical investments and mutuality are becoming increasingly attractive for non-Muslims who are looking for a different kind of financial proposition, particularly among millennials, both for insurance and other financial products. Historically commentators said that culturally we were not ready to take this leap – but with the foundations in place, the time may now be right.