With an average growth rate of 27% the General Takaful business as a whole is continuing to outperform conventional insurance growth of 19%. This high level of growth is of course attributed to the low starting point from which the industry originates, as Takaful remains a relatively new proposition in many markets.
However, Takaful’s ability to capture a previously untapped market is proving to offer significant expansion potential for the emerging market insurance industry at large, keen to replicate the penetration rates of the world’s advanced economies and Asian tigers.
In most cases, markets where Takaful is offered are enjoying growth in GDP and increased consumer consumption which, as AM Best’s recent Takaful report notes, has resulted in significant increases in insurance premiums of the market as a whole.
Generally speaking
General Takaful has been buoyed by increased demand for protection in growing economies where compulsory lines of insurance have been introduced. The introduction of Takaful-specific regulations and minimum capital requirements in markets such as the UAE, Saudi Arabia, Bahrain and Malaysia have gone a long way to establish Takaful beyond a niche offering in many Muslim majority nations.
As a result, the financial performance trend of Takaful companies has improved greatly, although this varies significantly between operators and, as shown in the profitability of General Takaful, depends greatly on the individual market and operator expertise.
General Takaful profitability has suffered from intense competition in the GCC, as it has proved increasingly difficult to attract profitable business away from the more profitable and well established conventional insurance players.
AM Best cites that General Takaful has been experiencing approximately 10% higher acquisition expense ratios. Combined with higher management expenses, especially among start-ups, this resulted in operating expense ratios of 25% in 2009, against 19% for conventional insurers. AM Best does however go on to note that underwriting performance, as measured by the claims ratio, has remained remarkably close between conventional and Takaful companies.
Technically, profitability will remain the most important driver for the viability of Takaful companies. However, with technical profitability lagging behind that of conventional insurers, investment performance becomes critical for competitiveness.
Re-Takaful, re-think
In general, re-Takaful has also failed to grow as rapidly as initially expected. While there has been tremendous growth in the primary Takaful market over the past few years, this has not translated into commensurate increased re-Takaful demand because Takaful operators have been over-utilizing traditional reinsurance capacity.
Re-Takaful operators have been in operation for some time now and as a result there is now sufficient capacity with adequate financial security to cater for Takaful operators’ risk management needs.
There still remains a tendency by some Takaful operators to continue buying reinsurance cover from conventional risk carriers with many decisions continuing to be made on exclusively economic grounds, properly assessed or otherwise, with little regard (if any) for the primary role and purpose of and impact to their Takaful activities.
As a result, re-Takaful operators are under increasingly heavy pressure to streamline their products towards conventional reinsurance models. This is due to the high conversion costs involved in offering re-Takaful coverage and an underlying need to implement sufficient education and workforce training, due to the new and inherently different processes and techniques involved.
The majority of re-Takaful companies are consequently engaged in traditional reinsurance business. The growth of the re-Takaful market depends on whether primary Takaful operators come under enough pressure to alter their reinsurance purchasing patterns and seek Shariah compliant cover for themselves.