The global takaful market is expected to grow by 14% this year and could top $US20 billion ($21.77 billion) in gross contributions by 2017, according to Ernst & Young.

Developing markets such as Saudi Arabia, the United Arab Emirates and Malaysia are driving take-up in the Islamic insurance products, on the back of double-digit growth in Islamic banking assets.

Insurance penetration in these key markets is generally low – about 2% of GDP on average – and underlying growth potential is strong.

“In the longer term, given the demographics and economic structures, rapid-growth markets such as Turkey and Indonesia offer wider upside potential,” Ernst & Young says.

Saudi Arabia is likely to remain the core market for Islamic insurance business, commanding 50% of global contributions.

Countries from the Association of Southeast Asian Nations, led by Malaysia and Indonesia, account for one-third of the global takaful market, thanks to their large numbers of young Muslim residents with good employment prospects.

New markets such as Oman, Pakistan and Indonesia are making headway.

Last year Malaysia’s insurance industry attracted new players from Canada and the US such as Sun Life Financial and AIA, which sought to acquire local operators.

Indonesian takaful operators achieved 43% asset growth as the market matured.

Ernst & Young’s global takaful online survey shows 42.1% of providers have combined operating ratios of 80-90%.

The main distribution channels include brokers and retail-based channels.

Although global annual growth has moderated from 22% between 2007-11, 14% gains are expected until 2016.

“With strong competition from conventional incumbents, takaful operators are likely to continue their struggle in the medium term, although some will look at alternative customer segments and explore merger options,” Ernst & Young says.

Family takaful and medical insurance, particularly in markets such as the United Arab Emirates, Malaysia and Indonesia, offer growth potential.

A takaful company oversees pools of funds contributed by policyholders, but does not necessarily bear risk itself.

Providers must follow religious guidelines including bans on interest and pure monetary speculation and investment in industries such as alcohol and gambling.