By Shaheen Pasha
Financial crisis forces smaller and mid sized companies to consider mergers for survival.
The Islamic insurance industry, known as takaful, is seeing more interest in consolidation as companies face increasing competition, weak market penetration and a higher expense base than conventional counterparts.
The financial crisis is also putting pressure on smaller and mid sized companies to consider merging with another company, said Hisham Solaiman, financial manager at Kuwait based National Takaful Insurance Co.
He said: "We've had offers for two mergers at our company but after some negotiations, we decided against the deal," adding that National Takaful Insurance wasn't actively looking to merge, but was open to discussions when approached.
Experts say that discussions are increasingly common with many international players also looking to enter the takaful space.
Peter Hodgins, partner, Clyde & Co, said: "Most weeks I have conversations with international insurers eager to break into the insurance market here."
The company advised RSA Insurance Group's acquisition of Oman's third largest insurer Al Ahlia, for $49.35 million in February.
He added: "It's fairly early on in discussion but there's a lot of interest in takaful with insurers asking if it's the way to go in the region."
Buying a company would be one way in, he said, adding that he expects to see more consolidation among takaful companies over the next 12 months to 24 months.
From a growth perspective, takaful is expected to be a clear growth driver within the $1 trillion Islamic finance industry over the next five years.
The Gulf Cooperation Council (GCC) area is home to more than 40 million of the world's 1.6 billion Muslims, but insurance penetration within the region is still limited.
With potential demand in place for sharia compliant products, including takaful, the region has seen a rush of new players eager to tap into the market in its early stages.
But it has resulted in a fragmented market with a few large players dominating the market, while smaller and mid-size firms struggle to make a profit.
Tommy Trask, executive director, Alpen Capital, said: "The smaller players are having a tougher time because they don't have economies of scale or distribution capability."
He added: "They also have a high exposure to motor insurance where it is competitive and profitability is weak."
Takaful insurers also have the added expense of paying for a overseeing sharia board while having limits on the investments they can make, due to issues of sharia compliance.
That puts pressure on profitability, especially when takaful companies are competing with conventional players.
Consolidation could also be spurred on as regulatory bodies become more reluctant to give out new insurance licenses in markets such as the UAE and Saudi Arabia.
The UAE, which currently has 56 licensed onshore insurers servicing a population of 5 million, recently put a moratorium in place on new licenses.
While an official stance has not been taken in Saudi Arabia, Clyde's Hodgins said his clients have reported that they are being discouraged from obtaining a new license while there are acquisition opportunities to enter the market.
And some existing conventional insurers in the region are keeping an eye out for opportunities. Omer Elamin, senior managing director of Arab Orient Insurance, said the company is adopting a wait-and-see approach to entering the takaful market given uncertain financial conditions.
Elamin said: "But if things pick up here, we might consider entering the takaful sector by acquiring or buying a major share of a company."
He also added that the UAE's restrictions on new licenses would prevent the company from starting its own takaful firm.
For international players eager to enter the takaful market, experts see more joint ventures between existing companies and established players abroad.
Trask, from Alpen Capital, said: "There is a clear advantage for participants to choose an efficient and strong operator."
He added: "I think we will see more joint ventures because international players can provide technical expertise as well as make operations more efficient with administration."
Zurich Financial Services Group entered a joint venture deal with Abu Dhabi National Takaful Company in late 2008 and Italy's Assicurazioni Generali SpA said in December that it was looking into a joint venture with Qatar Islamic Bank to offer takaful. (Reuters)