Dubai: Despite the general decline premium growth across the GCC in 2016, the takaful sector in the UAE showed the most favourable growth with a rate of 6 per cent.

Rate increases for motor insurance and premium income from new covers for compulsory medical insurance in Dubai were the main drivers of this trend. Three of the greatest beneficiaries were ASCANA Takaful, which recorded year-on-year gross premium growth of 60 per cent in 2016, followed by Takaful Emarat and Methaq Takaful, which both saw their premiums grow by more than 40 per cent thanks to new extended compulsory medical business from the Dubai Health Scheme.

As these examples show, there are still a number of fast-growing companies in the GCC’s Islamic insurance market, but measuring growth in percentage terms can be deceptive because many takaful companies are still growing from a relatively small base.

Underwriting profitability remains the key issue for Islamic insurers. The publicly listed Islamic insurers in the GCC generated an estimated combined pre-tax profit of about $683 million (Dh2.5 billion) in 2016, compared to about $274 million in 2015.

While Saudi players accounted for bulk of the profits, the eight listed takaful players in the UAE, which had a market share of 16 per cent by gross premiums in 2016, were particularly weak compared to all 29 listed insurers in this market. These eight takaful companies suffered a combined net loss of $24 million, while the remaining 21 listed insurers generated a combined profit of $270 million.

The overall results of the takaful sector in the UAE were dragged down by one company that suffered exceptional losses of $48 million in 2016 and $44 million in 2015. However, five out of the eight listed takaful companies generated a net underwriting loss of $64 million in 2016, versus $32 million in 2015.

“Operating performance remains one of the key issues in the takaful sector in the UAE. This is because companies often write less-profitable personal lines and their premium income is too small to dilute their fixed operating costs. In addition, in 2016, some companies had to strengthen their reserves due to new regulations, which was an additional drag on their results,” said S&P Global Ratings’ credit analyst Emir Mujkic.

Despite market challenges Abu Dhabi National Takaful, consistently generates strong combined ratios and outperforms the average combined ratio of the listed conventional insurers in the market. Despite its relatively small size by gross premiums, the company benefits from its relatively low exposure to highly competitive personal lines and focuses instead on stronger performing commercial lines and family (life) business.

Regulatory challenges

Dubai: The new risk-based regulations pose a significant challenge to many smaller and less-diversified insurers with tight capital buffers in the UAE. Takaful companies comprise a fair portion of this segment and a number of takaful insurers will therefore be particularly affected by the new rules, which will need to be fully implemented by the end of 2018.

Based on year-end 2016 data, the total shareholders’ equity of four out of eight listed takaful companies in the UAE was below the minimum capital requirement of $27.2 million (Dh100 million), applicable under the new regulations. Accumulated losses due to weak underwriting results at some UAE takaful companies have led in many cases to a decline in their overall capital positions. In addition, takaful companies often allocate a material proportion of their assets to illiquid real estate investments for Sharia compliance, which may cause additional volatility in their equity positions if real estate prices in the region continue to decline.