Bermuda has historically been at the forefront of the growth and success of the global, conventional insurance and reinsurance market.

More recently, however, interest has been sparked in a relatively new and growing market of Shari'ah compliant insurance and reinsurance, takaful and retakaful, the insurance and reinsurance of the Islamic world.

Statistics indicate that approximately 25 percent of the world's population is Muslim. This fact, combined with the immense wealth held in the Middle East and North African region, bodes well for global growth in takaful and retakaful businesses as well as pointing to a growing need for Bermuda service providers to support such opportunities.

It is widely accepted that the conventional insurance model is incompatible with Islamic beliefs – consequently, Shar'iah compliant structures have been developed as a way for Muslim clients to share risk.

Takaful was borne of the Islamic principle of Al-takaful which means bear ye one another's burden. This principle incorporates values of cooperation, brotherhood and solidarity for the good of the community.

In some respects, Shari'ah compliant insurance companies are similar to conventional insurance companies.

However, because takaful companies are created based on Muslim ethical principles there are certain key characteristics of a takaful company that distinguish a Shari'ah compliant company from a conventional company.

For example, two separate funds must be established in a takaful structure.

One fund is established for the participants (the policyholders), the takaful fund, and the other for the operational costs of the company, the operator's (or shareholder's) fund. Similar to conventional mutual insurance entities, the takaful fund operates under pure cooperative principles, but is protected from default of the operator's fund. Seed capital and management costs are drawn from the operator's fund and income for this fund comes in the form of either a predefined manager's fee or a share of investment returns and underwriting results, or a combination of both.

Other Muslim ethical principles direct business decisions, including in matters of investments and profit-making. For instance, the solidarity principle and the equal distribution of surplus ensure that takaful structures are established for the good of the community, and as the takaful fund is seen as a pool of risks managed under solidarity principles, neither fund is meant to accumulate surpluses at levels excessively higher than those strictly needed to protect the funds from volatile results. Further, the investments of a takaful or retakaful operational structure are restricted in deference to Islamic principles and beliefs.

For example, investments cannot be made in gambling institutions, businesses that make alcohol, sell tobacco or weapons, or in assets that pay interest.

A takaful company must establish a Shari'ah board in addition to a conventional board of directors.

The role of the Shari'ah board is to ensure that the processes, investments and products of the takaful entities are compliant with Shari'ah law.

Analysis of the market potential for takaful insurance indicates that a huge and fairly untapped opportunity exists. Current interest in takaful providers is likely due to the fact that takaful contributions are forecast to grow roughly six-fold over the next decade.

The first takaful insurer was established in Sudan in 1979. Now there are more than 130 takaful companies in both Muslim and non-Muslim countries. The highest concentration of these companies is in the Gulf Cooperation Council countries (e.g. Bahrain, Qatar, United Arab Emirates, Oman, Saudi Arabia, and Kuwait), mostly oil exporting nations with large economic growth rates.

Key growth drivers in this region are the favourable demographic of a young and growing population, the higher wealth and growing per capita incomes, a demand for a range of financial services, and up until now, a low insurance penetration when compared with other emerging markets and Organisation for Economic Cooperation and Development countries.

Takaful providers vary from full takaful and retakaful operators to conventional insurers operating takaful windows. One indication of the emerging presence of takaful business into the mainstream is that AM Best has developed rating methodologies to assess takaful insurance companies.

Bermuda's well regarded regulatory environment, access to market and talent, and its strong reinsurance industry position the Island for prospective takaful operations.

Due to the current shortage of retakaful capacity, in particular, possibilities abound for conventional reinsurers to support the industry as well as capitalise on opportunities to develop takaful and retakaful models.

Bermuda is the world's leading domicile for captives so it makes sense that there are opportunities for Middle East corporations to form takaful/retakaful captives on the basis of mutual indemnification of losses (association captives). There are also opportunities to develop retakaful and retrotakaful entities for the United States market due to Bermuda's prime global location.

Because of its inherent ethical practices, ethical investments, and transparency of contracts, a powerful business argument also supports the attractiveness of takaful and retakaful companies to non-Muslims, indicating that when it comes to financial growth opportunities in Bermuda for Shari'ah compliant businesses, even in the current economic climate, the cup is half takaful.

Associate Jessica Lightbourne is a member of the Insurance Team within the Corporate and Commercial Practice Group at Appleby. A copy of Ms Lightbourne's column can be obtained on the Appleby website at www.applebyglobal.com. This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.