The Best's Special Report, Takaful Operators Struggle with Growth and Profitability, also notes that despite the rapid growth of takaful on a global basis, it has struggled to take hold in Middle East markets, other than Saudi Arabia, which are considered to be concentrated with a few large players dominating their respective markets.
The report contains an analysis of 14 GCC takaful operators and 24 conventional insurers in the UAE, drawing out distinctions between the two groups in terms of performance and operating results. The smaller scale of many takaful operators results in high costs bases and expenses ratios that dampen operating performance. For example, takaful companies had a weighted average expense ratio of 30% in 2013, compared with 20% for the UAE conventional market.
"Given the huge global Muslim population, AM Best believes significant opportunities exist for takaful operators to provide sound financial protection in line with the consumers' religious sensibilities," said Michael Dunckley, Financial Analyst.
A number of challenges remain, including market conditions that leave takaful operators subject to fierce pricing competition from more established insurers that benefit from brand awareness and more established distribution networks. Other challenges involve achieving growth without compromising on profitability, developing a niche market position and a loyal customer base.
Takaful operators are differentiated from conventional insurers by the opportunity for policyholders to share in the underwriting profit. While shareholders require dividends to justify their capital investment, takaful policyholders also maintain the right to share in the surplus that accrues from good management of a takaful fund. Striking a proper balance of earnings is important to improving mutuality, as well as policyholder protection, AM Best said.
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| Source: DIFC. Shah. |
Despite AM Best's gloomy prognosis, there is activity in the Middle East when it comes to takaful. Chirag Shah, Chief Strategy and Business Development Officer, Dubai International Financial Centre Authority (DIFC Authority), said however in a keynote at the World Takaful Conference which took place from 13 to 14 April in Dubai that retakaful* is also facing challenges. He said the reinsurance sector crossed the US$1 billion mark of gross written premiums by the end of 2013. The DIFC hosts many major insurance conglomerates, including AIG, Zurich, Allianz, MetLife, Lloyds of London, Swiss Re and Munich Re and retakaful players like Emirates Re and Takaful Re.
Shah said: "Although retakaful has witnessed significant growth as an Islamic alternative to conventional insurance, it still represents a small portion, approximately 2%, of the overall insurance penetration in key markets. The sector is facing a multitude of challenges like the need for skilled professionals, lack of innovation, depreciating profit margins, the lack of a deeper pool of sharia-compliant investment opportunities, as well as issues of operating efficiency and scalability, among others."
Click here to obtain a copy of the AM Best report.
*The Islamic financial equivalent of reinsurance, in which an insurance company may depend on another company for insurance coverage.