The Islamic insurance industry is estimated to hit 12 billion U.S. dollars of global contributions in 2012, up 44 percent from 2010, but the once bullish growth will be probably mitigated due to civil unrest in some Arabian countries, fierce competition and ongoing debt woes in Europe, according to Ernst and Young.

According to the 5th annual edition of the World Takaful Report 2012, published by global consultancy Ernst and Young on Monday in Dubai, the market for Islamic insurance, known as Takaful, will continue to grow at an annual double-digit pace, but at lower rates than in recent years.

Speaking at the two-day World Takaful Conference, which runs in its 7th edition in Dubai, Ashar Nazim, Middle East and North Africa (Mena) Head of Islamic Financial Services at Ernst and Young, said that in 2010 global Takaful contributions were up 19 percent year-on-year, reaching 8.3 billion dollars. The sector grew slower compared to previous years.

"With current growth trends, and the addition of new fringe markets such as Indonesia and Bangladesh, we expect gross contributions of 12 billion dollars by 2012," said Nazim. However, growth will be impaired this year by the ongoing Arab turmoil in some Mena countries. Among key markets, Malaysia and the United Arab Emirates achieved growth rates of over 24 percent. The Kingdom of Saudi Arabia, the largest Takaful market with distinct, contributed 4.3 billion dollars or 51.8 percent of the industry at an average contribution per operator of 141 million dollars. Malaysia grew 24 percent to reach contributions of 1.4 billion dollars at an average contribution per operator of 141 million dollars.

There are 77 Takaful firms operating in the Gulf Arab region, where 40 million inhabitants reside, while 14 operators share the market in Malaysia with a total population of 28 million. While basically Takaful industry targets 1.5 billion Muslims worldwide, an increasing albeit small number of clients are non-Muslims, especially Western expats who live and work in the Middle East and South East Asia.

Financial sanctions against the central bank of Iran imposed by the United States and the European Union at the start of 2012 will also weigh on Takaful growth, a spokesperson of a Takaful operator said on the condition anonymity.

Iran's banking system is fully based on Shari'ah. A parallel conventional financial system, like in Saudi Arabia, does not exist in the Islamic Republic.

In contrast to conventional insurances, Takaful, payments contributed by policy holders, are pooled in a fund which is allowed to solely invest in pure Islamic or halal projects and securities. Under Islamic law or Shari'ah, listed shares are banned or considered haram if their underlying firms produce weapons, alcohol, pork meat, adult entertainment or financial products based on interest rates.

Under the Shari'ah-layer, Takaful companies are for example allowed to invest in commodities and real estate, but not in hotels or in hedge funds. Speculative investment strategies such as short-selling or day-trading are also banned under Shari'ah.

While Ernst and Young's Nazim sees a potential for Takaful European countries with significant Muslim populations like the UK, France or Germany, "the Euro zone debt crisis has weighed on expansion dreams in the Western world," said Dr. Saleh Malaika, Chairman of Saudi IAIC Cooperative Insurance Company, known as Salama.

Ernst and Young's Nazim agreed with Malaika, saying that increased solvency requirements insurers add to the difficulty of launching Takaful in the European Union. The increased regulatory pressure might also limit European insurers' appetite to expand overseas, albeit leading re-insurers such as Munich Re or Hannover Re are expanding their Islamic Re-Insurance or Re-Takaful business, especially in Malaysia.

A CEO of a conventional insurer who did not want to be named said the Takaful business develops much better in Southeast Asia than in the Gulf Arab world. "Expectations for the Middle East were simply too high. The number of Takaful operators there is likewise high, weighing on margins and pushing up costs."

According to Salama Chairman Malaika, the lack of Takaful experts is one of the industry's largest challenges. "We simply do not find enough staff which is familiar with the world of insurances and the principles of Islamic finance at the same time. "

However, Malaika said the increasing number of competitors in the Islamic insurance industry is not a burden, but a positive challenge. "Competition is good, it breeds new products and triggers innovation."