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GCC’s takaful outlook positive on strong underwriting profitability

Takaful insurers’ improved profitability is largely driven by an increase in prices triggered by regulatory changes

Gulf News


The Islamic insurance (Takaful) industry in the GCC is expected to gain in terms of strong underwriting profitability, thanks to regulatory changes in some countries that have pushed up insurance prices, improving their profitability in 2018, according to analysts.

The improved pricing, particularly in motor and medical cover has given the much needed push to the underwriting profitability of the region’s insurers who have been facing underwriting losses despite double-digit premium growth.

“The Takaful sector’s improved underwriting performance will help it halt capital erosion, attract fresh investor interest, and will allow it to focus on its most lucrative markets,” said Mohammad Ali Londe, an analyst at Moody’s.

Takaful insurers’ improved profitability was largely driven by an increase in prices triggered by regulatory changes such as the introduction of actuarial reserving in Saudi Arabia and the UAE. In Saudi Arabia, where the entire market is Sharia-compliant, actuarial reserving and pricing contributed to a decline in the overall loss ratio to 78 per cent in 2016 from 80 per cent in 2015, with a further reduction to 77 per cent over the first nine months of 2017

In UAE, Takaful operators’ loss ratio fell to 63 per cent in the first nine months of 2017 from 89 per cent and 79 per cent at year-end 2016 and 2015 respectively. “For many insurers, this has provided some respite from the capital depletion following bottom line losses in previous years. A sustained improvement in profitability would help the Takaful market regenerate capital over the medium to long term,” said Londe.

Growing share

In terms of global market share, the GCC region dominates the global takaful industry, by representing 77.2 per cent of the world’s takaful gross written premium (GWP) in 2015, according to a recent report by Alpen Capital.

At an estimated $11.5 billion, the region’s takaful market has grown at a compounded annual growth rate of 18 per cent from 2012 and accounts for nearly 44 per cent of the GCC insurance sector. Preference towards Sharia-compliant financial solutions and an expanding non-life market are the factors aiding growth.

Saudi Arabia is the largest Takaful market in the region with a GWP of $9.7 billion. The market size is same as that of the overall insurance industry in the Kingdom, as all the domestic insurance firms follow a cooperative model, which requires being Sharia-compliant.

The takaful markets in the other countries in the GCC are relatively small with a market size of less than $1 billion. “At 0.5 per cent in 2015, the penetration level of takaful insurance in the GCC is much lower than the conventional insurance sector. This presents significant opportunities for Islamic insurers,” said Siraj Bhavnagarwalla, Managing Director, Alpen Capital (ME) Limited.

There are about 40 takaful players in the region, excluding Saudi Arabia that is home to 35 Sharia-compliant insurance companies. The market appears overcrowded in view of several companies competing for the petite size of premiums.

The takaful providers faced a slowdown in premiums in 2016, however, the listed takaful players reported pre-tax net income of $683 million during the year, a substantial increase from $274 million in the previous year. This is mainly a reflection of the performance in Saudi Arabia, wherein players benefited from the implementation of actuarial pricing ensuing into a rise in pricing of motor premiums.

“A relatively small size, less diverse business and short tenure of experience compared to the conventional players, places the Takaful insurers at a higher degree of risk to economic deceleration,” said Bhavnagarwalla.

The Takaful industry is developing, given the low penetration levels and a maturing regulatory framework. Insurance regulators in the UAE, Bahrain, Oman and the independent financial hubs of Dubai International Financial Centre (DIFC) and Qatar Financial Centre (QFC) have introduced regulations specific to the Takaful industry.

Qatar (excluding QFC) is redrafting its regulatory framework to include specific laws for the Takaful sector. Kuwait in its new insurance law draft has also set specific rules for the sector. In November 2016, the UAE Insurance Authority capped the wakala and mudarabah fee on annual renewable policies at 35 per cent of GWP and investment income 8. Such new regulations aim at standardising processes, developing corporate governance, strengthening technical provisions and protecting the interest of policyholders.