XL Group recently announced it had established a binder relationship with Cobalt Underwriting, an underwriting agency specifically created to provide Shariah compliant commercial insurance and reinsurance products. Both companies see significant opportunities for these Shariah compliant products in the global insurance market, with London the obvious hub from which to develop operations.
Bermuda:Re spoke with Jason Harris, chief executive, international property and casualty insurance for XL Group and Richard Bishop, CEO of Cobalt Underwriting about the Shariah market and the ambitions for its development.
How significant is the potential of Shariah insurance? Where geographically do you see opportunities for growth and on what product lines?
Richard Bishop: The scope for Shariah insurance is substantial. Islamic finance accounts for trillions of dollars in transactions each year. The protection of assets that underpin those transactions is therefore a substantial opportunity for insurers offering Shariah-compliant products. The geographical opportunity is global because Islamic finance, like any other form of finance, is now an increasingly international activity. Therefore, whilst the Islamic nations tend to be in the Middle East or Asia, their investors are increasingly looking outwards.
Islamic finance is mainly asset-based, so you tend to be looking at types of coverage needed to protect those assets. Naturally, property, construction and related lines of business are a strong fit. A substantial amount of the economic activity that generates Islamic financial transactions is actually centred around trade. Therefore insurance lines that support trade such as marine cargo, trade credit and political risk are all important areas in the Shariah space.
Jason Harris: We’re initially putting sales capacity behind commercial property, targeting businesses with a turnover of $50 million or more. We believe this is the most appropriate starting point, but this initiative does not start and end with commercial property.
This initiative is also about leveraging London’s reputation in finance. London is already a hub for conventional services so we feel there’s an opportunity to not only attract new buyers through Cobalt into London, but also to convert business that is already placed in London on a conventional basis, providing buyers with a viable alternative and a high-quality service proposition through Cobalt’s Shariah-compliant model .
Does such insurance require a boots on the ground approach and how does this tie in with XL’s international strategy?
Harris: This offering requires us to set up infrastructure and work closely with Cobalt and their Shariah Supervisory board. We intend to use our network to service clients in order to satisfy untapped demand. As that demand develops, we will consider next steps, which may yet include geographical expansion.
What is Cobalt’s role in your development of Shariah insurance? Will they be deploying XL capacity? Will it be a partnership?
Bishop: When we created Cobalt we set out to create a platform that would enable us to replicate the London market syndication approach to risk, but in a Shariah-compliant setting. We have created a platform that will provide consistent underwriting and Shariah interpretation of risks that are brought to us on behalf of the market. We will be working with XL and other global players to generate the capacity needed to meet the demands of the Islamic market. Whilst XL are our first capacity provider, they recognise that we will need to turn to the wider market for some of the exposures that we’re asked to look at and that’s what Cobalt is all about—it’s about providing access to underwriting capacity.
Harris: We have clearly had to establish our own internal processes and management of funds in a way that ensures compliance, but a partnership is a good way to describe the relationship with Cobalt.
What are the major issues around Shariah-compliance?
Bishop: With a Shariah-compliant insurance contract the start and end point is that all of the funds related to the transaction are kept separate from other funds. You must ensure that all premiums collected and claims paid are made utilising Shariah mechanisms and in accordance with Shariah practices.
We also have to review every contract document to make sure that there’s nothing contained within it that would contravene Shariah principles and that includes policy coverage – for example, there are certain aspects of Shariah that preclude the provision of cover for certain industry sectors, so we act as the gatekeeper to each transaction ensuring all elements of the transaction are handled in accordance with Shariah. That is why we have employed in-house Shariah advisors—to ensure that we’ve checked off each and every aspect of each transaction.
What kind of additional cost and time does Shariah compliance add to insurance relationships?
Bishop: Shariah is very much about ensuring that a transaction is handled in a fair way, so we believe that the cost differential will be marginal.
Harris: If we find the right quality of risk we should be able to deliver a solution that is cost-comparable with its conventional counterpart.
Will reinsurance form a component part of the Shariah market?
Harris: The opportunity for this project is to create new capacity for Shariah-compliant insurance solutions, and that includes reinsurance. London, like Bermuda, writes business in the reinsurance world as well as the insurance world. If there is a need for new capacity then that will require a response from the global insurance market, and that is the same with reinsurance.
XL, Cobalt Underwriting, Shariah, insurance, London