Dubai: Profitability of the GCC Islamic insurance (takaful) industry is expected to remain relatively weak during the current year and the year ahead despite an impressive 20 per cent year-on-year growth gross contributions (gross premiums) in 2014 and 2015 according to rating agency Standard & Poor’s.
“For a number of companies operating in these overcrowded markets, we find that precipitous growth, combined with net losses, is eroding their capital strength and damaging their credit profiles. Most takaful players are still relatively small compared with their conventional peers. Their shorter track records and less-diverse books of business put them at a disadvantage now that the falling oil price and stricter regulation are hitting GCC insurance markets,” said Emir Mujkic, Associate Director, Finance Services of Standard & Poor’s.
Most takaful players are still relatively small compared with their conventional peers. Their shorter track records and less-diverse books of business put them at a disadvantage now that the falling oil price and stricter regulation are hitting GCC insurance markets.
In 2015, the combined gross premium income of Islamic insurers in the region exceeded $10 billion (Dh36.7 billion) (based on available data from listed companies), which compares to roughly $9 billion of premium income generated by conventional insurers for the year in the GCC. More than 85 per cent of the region’s Islamic insurance premiums were written in Saudi Arabia, which has the largest Sharia-compliant market in the region. There are half a dozen explicitly takaful in insurers and 28 Islamic cooperative companies operating in Saudi Arabia.
Saudi Arabia
The Islamic insurance industry saw significant premium growth over the past two years as organisations such as the Dubai Health have introduced comprehensive medical insurance schemes and the population has continued to grow. In addition, some markets, particularly Saudi Arabia, have seen strong tariff increases as a result of the introduction of actuarial pricing guidelines. However, now that more policies are adequately priced, premium growth has slowed. In the first half of 2016, year-on-year premium growth for GCC Islamic insurers slowed to only about 4 per cent.
Recent slowdown, Mujkic said is largely influenced by factors such as increasing selectiveness by some insurers, which are choosing the business they write more carefully to mitigate their risk of underwriting losses; Material tariff increases in Saudi Arabia over the past two years, following the introduction of actuarial pricing guidelines; and a slowdown in insurable activities as the sharp drop in hydrocarbon prices from the record levels in 2014 hit economic growth across all Gulf countries.
Despite overall slowdown in the industry, there are still a number of fast-growing companies in the market, but measuring growth in percentage terms can be Deceptive as many takaful companies are still expanding from a relatively small base. For example, eight of the 10 fastest-growing insurers in the first six months of 2016 had a gross premium income of less than $100 million.
Remaining GCC states
In Saudi Arabia, by far the most-profitable market, all insurers operate on Islamic principles. Including Saudi Arabia, the GCC’s Islamic insurance market generated an estimated pretax surplus of more than $260 million in 2015 compared to $244 million in 2014 and $160 million at half-year 2016. But the takaful sector in the remaining GCC states generated a combined net loss of about $5 million in 2015 compared to a net profit of $49 million in 2014 and net losses surged to about $11 million during the first six months in 2016.
Most of the losses stem from weak performance by a small number of players, particularly in the UAE (the second-largest Islamic insurance market). Outside Saudi Arabia, Islamic insurers in the GCC region generally focus on mass-market products, such as medical and motor insurance, where margins are lower. Thus, of the eight takaful companies listed in the UAE, half reported a net profit at year-end 2015, but some of the remaining four were hit so badly, in particular from motor insurance losses, that the overall takaful market in the UAE recorded a total loss of US$43 million.
First half results for 2016 indicate that three of the eight insurers are still trading at a loss. “We expect that 2016 will be another loss-making year for the overall takaful market in the UAE,” said Mujkic.
