Takaful industry faces slower growth - study

  • Share via facebook
  • Tweet this
  • Bookmark and Share

Expansion of the takaful (Islamic insurance) industry is slowing as firms struggle for scale and face growing competition, but the sector is still poised to sustain double-digit growth, according to a report by Ernst & Young.

Takaful, an industry which attracted $10.9 billion in gross contributions worldwide last year, has its core markets in the Gulf and southeast Asia and serves as a bellwether of consumer appetite for Islamic finance products.

Driven largely by Saudi Arabia and Malaysia, takaful globally is expected to grow by 16 percent annually in coming years compared to an average 22 percent rate between 2007 and 2011, said Ashar Nazim, Islamic financial services leader at consultants Ernst & Young.

That would see the industry edge close to $17 billion in annual gross contributions by 2015, with Saudi Arabia making up almost half of that figure, the report showed.

But firms have expanded in narrow product segments such as auto insurance which are saturated by competitors, sparking price competition to gain market share, Nazim added.

"Unless serious thinking goes into strategising the model and structures, you'll grow your market share at the expense of profitability."

A shift from general insurance to more profitable life business remains unlikely in the Gulf because of comfortable government-funded safety nets, with general business commanding a market share of as high as 96 percent in Saudi Arabia.

Takaful firms have struggled to control costs because of expanding workforces, and they have lost business to conventional rivals which can underwrite larger risks more efficiently.

Lopsided portfolio allocation is a key problem, especially in the Gulf outside Saudi Arabia where firms invest 25 percent in equities but just 2 percent in the more stable sukuk asset class, the report showed. Saudi takaful firms allocate more to sukuk, 25 percent, but 44 percent is held in low-yielding cash deposits because of regulatory requirements.

This means profits can swing widely. Return on equity for a sample of Gulf firms reached 0.4 percent in 2012, up from minus 7 percent in 2011 and minus 4 percent in 2010, the report said. In Saudi Arabia, return on equity jumped to 4 percent last year from minus 6 percent in 2011 and minus 1 percent in 2010.

Such volatility requires greater use of reinsurers, which in turn erodes profits: reinsurance ratios for takaful firms are as high as 38 percent in the Gulf and 31 percent in Saudi Arabia, with Malaysian firms at 14 percent.

Geographical expansion is one way out, but this is difficult because of expensive regulatory requirements and the lack of a standard approach to sharia-compliance across the world - two major barriers which remain unadressed, Nazim said.

"Unless there is regulatory clarity across borders, and a certain level of convergence, we believe this is holding back the internationalisation of the industry."

Aside from a few operators in Saudi Arabia and Malaysia, most takaful firms lack the balance sheets necessary to explore markets such as Indonesia, Turkey, Egypt and Qatar, which offer strong potential because of their demographics.

Although scale is a priority and there are 77 operators in the Gulf and 36 in Africa, consolidation looks unlikely.

"We do not see consolidation as a major theme in the near future. For this to happen there needs to be good value in the business. It's still a very young industry and it needs to be given the room to proliferate and grow in a more entrepreneurial way," Nazim added.

Clearer distinctions between takaful firms and conventional insurers are poised to change the sector in countries such as Malaysia and Indonesia.

Malaysia's Islamic Financial Services Act, introduced in July, requires the separation of life and general business lines; firms with composite licences that cover both sectors have five years to separate them.

Indonesia, which has 46 takaful operators, is poised to move away from allowing takaful windows, through which takaful services are offered by conventional insurers, Nazim said.

"This will create greater clarity and focus in business models, a good thing for the industry. In the near term, it'll require some operators doing composite business to reposition themselves," said Nazim.

"Only once there is clarity, then operators can understand what kind of consolidation can create or destroy value."

Related:
Join the Discussion

Disclaimer:The view expressed here by our readers are not necessarily shared by Arabian Business, its employees, sponsors or its advertisers.

Please post responsibly. Commenter Rules

  • No comments yet, be the first!

Enter the words above: Enter the numbers you hear:

All comments are subject to approval before appearing

Further reading

Features & Analysis
Dubai mulls rule change to lure more domiciled funds

Dubai mulls rule change to lure more domiciled funds

Proposed rules would create a new class of funds in the Dubai...

Gulf's rift over Qatar may slow investment, reforms

Gulf's rift over Qatar may slow investment, reforms

Analysts suggest dispute may not hurt immediately but could impact...

Dodgy data obscure reality of Gulf's economic boom

Dodgy data obscure reality of Gulf's economic boom

Economists say that as Gulf opens wider to foreign investment...

Most Discussed
  • 54
    Three UAE women attacked with hammer at London hotel

    I really feel that Arabian Business.Com should now close this comments page. This should be all about sympathy for the families not what it is/has turned... more

    Wednesday, 16 April 2014 1:06 PM - Adrienne
  • 51
    Why Dubai isn't a plastic city

    What is definitely not a plastic city. The Arabs have a culture dating back to several centuries. 50 years back Dubai was just a fishing village. Today... more

    Tuesday, 8 April 2014 3:49 PM - P. MADHUSUDAN
  • 48
    DMCC boss Ahmed Bin Sulayem entertains Robert Mugabe in Dubai

    @fga ''However today, simply because he decided to dispossess a few white farmers of their land and redistribute to the poorer indigenous blacks'' more

    Sunday, 13 April 2014 3:02 PM - Matt Williams