Takaful firms search for long-term assets

Allianz Takaful's Chief Executive Officer, Abdul Rahman Tolefat, speaks during his interview at the Reuters News Summit on Islamic Banking and Finance in Bahraini capital of Manama, Bahrain February 16, 2010.

MANAMA (Reuters) - The Islamic insurance industry, or takaful, is struggling to find suitable long-term investment opportunities, executives at the Reuters Islamic Banking and Finance Summit said.

The takaful -- or sharia-compliant -- insurance industry has grown at double- or three-digit growth rates so far as the Gulf Arab region is underpenetrated with insurance products in general, and has also attracted business from conventional peers.

But issues like the absence of long-term sukuk, or Islamic bonds, to compliment some of the products are hampering the process of asset deployment.

"As an insurer, if I want to offer annuity products I need to have long-term assets to match my liabilities which are still not available," Abdul Rahman Tolefat, chief executive of Allianz Takaful, told the summit in Bahrain.

Tolefat said the firm was in talks with a regional financial institution, urging them to issue a bond earmarked for the industry.

Islamic insurance works like mutual insurance, but there is a clear segregation of the assets owned by members and those owned by the insurer.

Unlike conventional insurance, investments made using the pool of funds have to adhere to sharia law and shun sectors such as alcohol and gambling. Islamic insurers also keep away from investments in risky assets and prefer fixed income products for parking their funds.

Global takaful premiums total about $2 billion to $3 billion and are expected to reach more than $7 billion by 2015, industry figures show.

While medium-term sukuk are available in the market, takaful firms in this space have to compete with big banks who absorb a major chunk of issues, leaving little for takaful firms.

"The credit rating of corporates who issue sukuk is just not there. I prefer an issue which has an 'A' rating and above. Even if they provide low yields, we don't mind," Tolefat said.

The regional sukuk market was dominated by real estate developers that saw strong demand during a property boom that ended in 2008, leading to a lack of highly rated issues.

"It hampers our ability to issue long-term annuity and long-term guarantee return products," said Nick Frei, chief executive of t'azur.

Founded by Bahrain's Unicorn Investment Bank, t'azur has operations in Bahrain and Kuwait and started to offer general takaful insurance in Qatar three months ago.

Frei said this was not a major constraint to the company as it could replace sukuk issues by long-term equity funds.

"There are enough sharia-compliant instruments out there for us to invest our money sensibly. The only limitation ... is that for sukuk for annuity-type assets," he said.

(Editing by Rupert Winchester)

(Reporting by Raissa Kasolowsky, Dinesh Nair and Frederik Richter)