With competition in the GCC Takaful sector only likely to increase further as more players enter the market, there appears to be a growing trend of operators utilizing unsustainable business models with aggressive under-pricing to stimulate rapid and immediate growth. With many Takaful and insurance business models left unchanged following the crisis, their current outlooks do not reflect the economic factors present after the financial downturn.
Shareholders need to balance their expectations with market realities, with reduced fees, new policyholder growth will increase in the short-term but may result in a capital flight when companies realise that this model is not going to be profitable in the long-term.
The insurance industry in the GCC is highly competitive with predatory pricing in the region negatively impacting profitability and growth. Product pricing should be competitive, yet sustainable. In a crowded industry such as insurance where competition is fierce, Takaful needs to match, if not surpass, conventional insurance in terms of product benefits and pricing. It is important for both the shareholder and the participant to receive optimum returns on their investment.
The GCC markets are currently in the process of gaining critical volume and are evolving from a protected industry to a globally competitive sector. As economies in the region mature, the Takaful sector is expected to expand rapidly. However, insurers in the region need to gear up significantly to capitalize on the opportunity and remain competitive in the evolving landscape.
Although the insurance and Takaful sector in the GCC is growing, it is still highly fragmented. There are more than 180 insurance players operating in the region. As a result, insurance companies seem unable to generate scale, retain a sufficient volume of premiums, build meaningful risk pools and underwriting capacity, and innovate. There is severe price competition in the region as many players are attracting the same set of demographics. It is for this reason that historically, GCC Takaful insurers have focused on developing commercial lines of insurance, due to the higher premiums and profits.
Hussain Mohammad Al Meeza, the managing director and CEO of Aman (Dubai Islamic Insurance and re-insurance), has said that new premium generation has been very slow in all sectors and that this issue is no longer limited to one or two sectors, adding that clients are increasingly being attracted by the ‘new’ rates that are available in the market.
With premiums touching historical lows, Hussein is unable to offer a rational answer as to why the rates are so low, stating that at their current levels “there is no way to cover even the basic operating costs, forget profitability”.
Hussein believes that the intense competition between insurers in the GCC market is driving the need for consolidation. However, he warns that this is not an easy proposition, as with many Takaful companies being publically listed, it would require majority consent from the shareholders.
“In terms of capital requirements, size, the risk profile, and particularly since the financial crisis, it is a good time to look at working together,” he adds.
Consolidation within the industry has been mooted for some time now, particularly in the developed Takaful markets of the GCC and Malaysia.
However, with huge potential for organic growth still available across multiple sectors and with consistently high growth rates, it might be difficult to slow down the rapid run-out of unsustainable Takaful policies in the short-term.
Unable to offer a solution, Hussein is still insistent that something needs to be done, and soon, accusing new market players of being short sighted in their business models as in the long-term these pricing models will not be sustainable.
He confirms that that there is currently an over-saturation in the market and this could eventually have an impact on the Takaful businesses of all the providers.