GLOBAL: Lack of economies of scale, underpenetration and a market highly overconcentrated – these are but a few of the reasons why the global Islamic insurance industry is struggling to expand further despite promising double-digit growth over the past few years. And it seems that Takaful operators, particularly in the Middle East, would face an even more challenging environment following sweeping regulatory reforms in the region.
“The more demanding insurance regulation in the region will increase short-term pressure on players in these typically overcrowded markets by increasing costs,” explained S&P in its latest Takaful report. “Shariah compliant insurers, in particular, are already struggling to manage high expense ratios because of their lack of scale.”
In the past 12 months, Gulf nations introduced enhanced insurance rules in a bid to bolster the industry through more stringent internal controls and liquidity management. These include tighter solvency measures in Bahrain, higher liquid asset requirements in the UAE and Kuwait as well as increased minimum capital requirements in Oman. And while these are viewed as credit positive by S&P, they have nonetheless made the operating environment stiffer for Takaful players.
Accounting for approximately 80% of premium income in the GCC, Saudi Arabia is the largest Shariah compliant insurance market in the world and the main driver of Takaful growth figures in the region, yet the jurisdiction is also navigating a more stringent pricing environment which analysts believe is likely to compel the overpopulated sector to either settle for a merger/acquisition or exit the market altogether (See IFN Report Vol 12 Issue 16:’ World’s largest Takaful market sees improvement but obstacles remain’).
The rest of the Middle Eastern region is also grappling with fiercer competition and a more challenging landscape. According to AM Best, Takaful operators have underperformed their conventional counterparts over the past four years (analysis based on 14 GCC Islamic insurers and 24 UAE conventional players), despite the Takaful companies generating a stronger claims ratio in most years. Lack of economies of scale is a major factor to this underperformance which has translated into higher costs and in turn has driven Takaful operators to undercut prices to capture business, thereby affecting profitability (See IFN Report Vol 12 Issue 15: ‘Takaful players paying the price of regulation disharmony’).
Product differentiation is another factor. “Unless [Takaful operators] successfully differentiate their products and attract new insurance buyers to their Shariah compliant product, we anticipate that it will be difficult for them to achieve sustainable business positions,” opined S&P.
It is clear that Islamic insurers will need to adopt a different strategy, instead of undercutting prices, to boost profitability – although the issues faced by Takaful operators are complex and multilayered – however, as with most new regulations, the environment takes time to adjust before the (intended positive) effects materialize. This could be seen in the case of Saudi Arabia.
Despite the possibility of a shrinking number of operators, Moody’s in its recent report on the Saudi Takaful market was optimistic that the sector would continue recording good underwriting profit in 2015 and 2016, driven by the price hardening in the medical and motor lines. The rating agency noted a steady boost in the market due to improving economic conditions and rising awareness in addition to other market factors including mandatory health and third-party motor coverage as well as the prudent actuarial reserve modeling implemented in 2013. And it is hoped that the Saudi experience – which saw the Kingdom’s insurance players generating a combined profit of SAR700 million (US$186.57 million) in 2014 against a loss exceeding SAR1.4 billion (US$373.14 million) in the previous year – would be replicated in neighboring countries.