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Takaful in Iran: New Frontier or False Dawn?

The lifting of sanctions in Iran could give a major boost to what is already Mena’s dominant Takaful market - but a lack of transparency and fragmentation in the global Takaful industry is clouding the true extent of its potential.
The easternmost country of the Middle East with a population of almost 80 million - is an especially unique country due to its status as the only official Farsi-speaking country in the region. Governed by a Shiite Islamic Republic, the prominence of the religious establishment continues to shape Iran’s business environment, and despite economic sanctions, Iran is one of the largest Takaful markets worldwide.

This could be due to Iran being the only country to maintain a fully Islamized financial system; thereby establishing a domain in which Takaful may thrive by making Sharia compliance a legal requirement of the domestic insurance industry.

Significantly, information regarding Iran’s Takaful model and its differences compared to other Islamic economies is sporadic and limited. This theme is recurring for Iranian companies across other industries and may complicate comparisons with other Takaful industries.

What is known is that Takaful and Iranian insurers are not differentiated like in other Islamic economies because in-house Sharia councils are not required, health, third-party motor and social insurance are compulsory in Iran, and that Iran’s Establishment Act stipulates life and non-life business from insurers will be partially ceded to Bimeh Markazi Iran: the insurance regulatory authority and official reinsurer.

Iran represents 44% of total global Takaful premiums (according to the Dubai Center for Islamic Banking and Finance (DCIBF)), which could increase if Iran alleviates its internal and external challenges with foreign investment and cooperation with other Islamic economies. The real debate will be whether this is possible and how far Iran’s Takaful industry can grow concurrently.
Regional comparison
Comparative sources regarding the Mena and Asia Takaful industries are extensive yet often omit Iran from their findings, despite its market size, which raised questions as to why this was the case. However, things are set to change now that Iran enjoys at least titular freedom from economic sanctions. One is still led to ask - why is information regarding this major Takaful market sparse?

One could posit the Shiite Islamic perception towards Takaful both explains the notable size of the Iranian market and also why analyses often exclude Iran from the already-wide variety of Takaful industries. This is despite their similarities in fundamental underlying values of mutuality - upon which even Sunni Islamic economies are divided on.

Iran’s Shia Islamic-based legal system significantly differentiates Iranian Takaful from Takaful models. Unlike other Islamic economies, it is noted that insurers in Iran do not require a Sharia council and do not operate as traditional Takaful operators because the Iranian government does not maintain a ‘strict’ division with conventional insurance. The meaning of Takaful is ambiguous in the Iranian context as the scantily existing research on Iran does not clearly differentiate between them.

This is perhaps due to the Iranian financial system being entirely based on Shia Islam, meaning its insurance industry is grouped under the umbrella of Sharia compliance instead of covering part of a dual system, which is commonly seen amongst the predominately Sunni Islamic economies.

As a result, Iranian insurers across the industry predominately have conventional operational structures with a prevalent use of subordinate Takaful ‘windows’. This trend shares similarities with the major Malaysian Takaful industry. Contrastingly, large segments of Mena and Asian markets have historically maintained fully-fledged Takaful models due to the Sunni criticisms of conventional insurance.
The contemporary history of Iran was, until very recently, largely embodied by US-led sanctions, given their effect over Iran’s tenuous yet promising economy. Iran’s Takaful sector will be heavily affected by the lifting of sanctions, based on how it has established itself as a leading market despite considerable economic restrictions - Iran’s Takaful industry might not have survived, let alone become one of the leading Takaful markets, had Iran not developed a resistance economy.

This is apparent if we consider the significant costs incurred by Iran’s Takaful and ‘Re-takaful’ industry through lost trade and investment. Iran has reportedly missed out on approximately $120bn in lost revenue since 2010, with the now formally decommissioned sanctions regime’s provisions and strictures against transactions with Iranian financial institutions being particularly salient. This was especially the case for Iranian insurers and Takaful operators, who have long been prevented from providing services in key Iranian transactions with prospective foreign firms in industries like commercial shipping. With Iran’s vital interests in oil and natural gas relying on shipping, such hindrances were inimical.

Yet Iran’s resistance economy bolstered the Takaful sector despite this setback by developing a large domestic market which has instrumentally helped it outperform its competitors – particularly those who enjoyed the advantage of not facing sanctions; Iran’s total Takaful revenue of $11.5bn in 2012 constituted nearly 50% of global revenue despite substantially low penetration rates (according to DCIBF).

Projections regarding the long-term future of Iran’s Takaful sector after sanctions, like most of Iran’s industry, have thus been bullish. As the country re-opens its markets, the considerable influx of foreign trade and investment across sectors such as oil and gas will necessitate greater workloads for its Takaful and Retakaful industry.
A false dawn?
The potential is conspicuous. Iran can undercut the risk of stunting it by circumventing certain internal obstacles and problematic global market characteristics.

Firstly, in an opened up market, the Takaful sector can meet different risks and higher expectations than those seen during the days of Iran’s economic isolation. The untapped status of the Iranian domestic market presents a substantial opportunity to grow even further but also poses risks to the long term wellbeing of the Takaful sector. This is most apparent in Iran’s ageing and insufficient infrastructure.

Substantial investment and expertise is required before Iran’s Takaful and Retakaful industry can meet these prospective challenges; especially given any ambiguity pertaining to pragmatic and functional considerations surrounding the exact terms and conditions of the recent removal of sanctions. This will have particularly notable ramifications for imminent Iranian, EU or possibly US economic activity and interaction.

Crucially, Iran’s Takaful industry may have limited room to grow due to the ongoing flaws of the global industry. A lack of standardized regulatory frameworks has restricted the global Takaful industry from actualizing its long-term potential. Complex regulatory differences have prevented operators from undertaking cross-jurisdictional work. Without achieving this, the growth of the industry and its leading players like Iran will remain restricted.

Facilitating a standardized framework to encourage multi-jurisdictional access will require greater political will from Islamic economies. As previously mentioned, however, cooperation is a questionable prospect due to deep-rooted divisions over the legitimacy of Takaful models. Iran’s re-introduction into the international realm could potentially exasperate this, given the clear disparities between its model and the models of an already-contrasting set of Islamic economies alongside long-standing political and religious conflicts and cultural-economic doctrinal differences
The outlook for Iran
Iran certainly possesses the potential to further consolidate itself within the global Takaful industry due to prospective influxes of foreign trade and investment. The strength of the Iranian domestic market and Iran’s strong presence within the global Takaful sector are crucial factors which have created the foundations for future growth.

However, this article stresses that the comparatively limited information available on the intricate details of the Iranian Takaful structure will affect the accuracy of any projections and leave some element of uncertainty regarding the future of Iran’s Takaful industry; particularly because this complicates comparisons with other Takaful jurisdictions. Iran’s economic future is positive but to fully comprehend the future of its Takaful sector will demand greater transparency on its operational structure.

Furthermore, we must distinguish the level of success the Iranian Takaful industry could achieve from the global industry where Takaful still lags behind conventional insurance in various Islamic markets. The structural difficulties of the Iranian economy are a crucial internal issue which, as the IMF notes, requires significant reforms to adjust Iran’s resistance economy to accommodate its now possible and expected reintroduction to the international system.

The real question remains with the entire Takaful market, which sets the boundary of how far Iran can expand. Iran’s return from isolation should potentially raise that ceiling but only through cooperation from its fellow Islamic economies. It remains to be seen whether religious and political differences can be overcome. However, it will be detrimental to the economic interests of the entire industry if they cannot.
Iran’s Takaful sector in numbers
$11.6bn - GWP in 2012

29.9% - Annual growth from 2008-11

44% - Share of global Takaful GWP

$23.6bn - Projected GWP by 2020

80m - Iranian population

Source: DCIBF

Published: March 2016
Title: Takaful in Iran: New Frontier or False Dawn?
Publication: Mena Insurance Review (MENA IR)
Authors: Michael Kortbawi, Philip Le (Contributor)

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