Takaful operators in the GCC and Malaysia are growing at a rapid pace and are enjoying strong capitalization on a consolidated funds basis. According to research from AM Best, who compared the performance of 131 Takaful operators to those of conventional insurers within the GCC and Malaysia, the Family Takaful business is more profitable than general Takaful, and is growing at a faster pace. Family Takaful is also outpacing conventional life insurance, representing the greatest opportunity for profitable growth of Takaful operators.
AM Best believes Takaful will continue to be among the fastest growing segments of the GCC and Malaysian insurance markets due to Takaful’s ability to increase insurance penetration in previously underrepresented areas. To ensure its longer-term viability, the Takaful sector needs to improve its ability to retain earnings within the Takaful fund and focus on product differentiation as opposed to competing on price alone.
The Takaful market has grown significantly in recent years, benefiting from the introduction of compulsory covers in many of the countries it operates, and increased understanding of the products and service offered.
In most cases, markets where Takaful is offered are enjoying strong GDP growth and increased consumer wealth which, in turn, has resulted in significant increases in insurance premiums for the market as a whole. As a result, most Takaful companies are competing with conventional insurers on pricing for the same business, rather than through a differentiated value proposition based on the ethical values of Takaful.
According to the report, competition within personal lines is likely to continue due to the recent economic turmoil. Customers are likely to continue to purchase the most cost-effective and necessary products, as opposed to paying for additional coverage.
Of greatest note is that while Takaful contribution volumes have increased sharply over the past few years, most Takaful companies that began operations in the past five years have fallen behind their original business plans.
Companies with overly optimistic growth targets have revised their projections downward as an influx of new Takaful companies coincided with the downturn in economic conditions.
The Family Takaful business has proved to be more profitable than General Takaful business, offering higher margins and stability, and is growing at a faster pace, as this is a new market that is not served particularly well by conventional insurers.
Family Takaful continues to represent the main growth driver in the Malaysian insurance market, showing average annualized growth rates of approximately 28% between 2005 and 2010. Family Takaful products currently dominate the Malaysian market with a 78% share of net contributions.
Family Takaful has also increased its presence over this six-year period. In 2004, the companies in these markets represented a scant 5% of the total Family Takaful. In 2009, this figure had more than doubled to 10.2%.
However the profitability of the Family Takaful business tends to be more volatile owing to more aggressive and concentrated investment portfolios.
This is not a consequence of the Takaful operators’ risk allocation, but rather a result of their asset composition; with their investments concentrated in Sukuk and private equity investments, which were among the hardest hit by the global downturn.