Insurance of any kind can be a hard sell in Turkey, with the population generally averse to insurance cover and penetration levels as low as 1.4%, according to some estimates.
Takaful also has a minimal profile in the Turkish market at present. The two firms that offer Islamic insurance products, Neova Sigorta and Asya Emeklilik, account for less than 0.5% of the insurance sector’s assets, which stood at an overall TL24.2bn ($10.9bn) in 2013, according to official data.
However, the increasing success of Islamic banks could point to a market opening for takaful underwriters. Turkey’s four functioning Islamic banks, known as participation banks because of political sensitivities in the constitutionally secular country, have posted strong asset growth since 2005, with their holdings now accounting for around 5% of the $811bn assets held by the banking sector in August.
Consultancy firm Ernst & Young (E&Y) has identified Turkey as a new market for sharia-compliant insurance. In the “Global Takaful Insights 2014” report, released in September, Turkey’s takaful market dynamics were noted as gaining traction thanks to the establishment of more participation banks, adding to the four already in operation.
With the government having announced plans to launch three state-owned Islamic banks as subsidiaries of the state-run conventional banks, Ziraat Bank, Halkbank and VakýfBank, by the end of 2015, greater depth will be added to the Islamic financial sector. This in turn will encourage new entrants as well as a broadening of the product base to include takaful options.
The E&Y report added that the government intends to give the sector longer-term backing. “The Turkish government’s aim to triple the share of Islamic banking assets in the country by 2023 with the help of state-owned participation banks and incoming players will help support the gradual growth of Turkey’s takaful industry."
Slow take-off
Even though Turkey’s large and relatively young population offers a potentially lucrative market for takaful underwriters, E&Y suggests a number of hurdles have to be removed before such products could take off, with supply-side constraints and a limited legal infrastructure for Islamic finance currently hindering growth.
“Challenges for Turkey’s takaful market also include a fragmented market which lacks the pricing power and tough competition among insurers at the lower end of the market,” E&Y noted.
Another study prepared by the General Council for Islamic Banks and Financial Institutions (CIBFI) and Thomson Reuters, agreed on Turkey’s developing potential as a takaful market.
In its survey, up to 38% of respondents expressed some interest in participation banking, with 10% saying they would definitely be interested. The study, “Turkey Participation Finance Report 2014”, said while 10% was a low figure it nonetheless indicated market potential for takaful service providers.
Personnel gap
Specialist training for staff is an area highlighted by the CIBFI report as necessary for the development of a strong Islamic financial market in Turkey, which requires the establishment of dedicated study programmes at universities.
This personnel gap could be bridged through proposals such as the establishment of an Islamic university. Mehmet Gormez, head of the Religious Affairs Directorate, told local media in October that the government was planning to develop Istanbul’s May 29 University into an international Islamic university.
Gormez said the university would help provide solutions to specific problems faced by Muslims, something he said existing higher schools of Islamic learning failed to do. Advanced courses in Islamic finance, for example, would help deepen knowledge and understanding on subjects such as takaful insurance.
Another boost for the market could come if the government decides to include takaful options in compulsory insurance schemes such as automotive or catastrophe insurance.
Earthquake insurance has become mandatory for homeowners and businesses in Turkey since 2012 following huge losses from a series of deadly quakes. As a result, the Turkish Catastrophe Insurance Pool has 6.6m policies written, giving a penetration rate of 37%, according to data from the Turkish Insurance Association. While still short of blanket coverage, the pool represents one of the largest aggregations of issued policies, after compulsory third-party vehicle insurance.
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