Despite rising contributions (premiums), which grew at over 15 per cent in 2012, the UAE takaful sector is not performing effectively for either the fund members, through generation of reliable fund surpluses for distribution, or shareholders, through generation of profits, according to a report released by Standard & Poor’s Ratings Services.
The report notes that overall, takaful fund deficits are increasing, at least in the UAE and Kuwait, thereby eroding capital strength and ultimately weakening the sector’s financial strength.
The continuing weak performance of the takaful insurance sector, particularly in UAE and Kuwait, cast a shadow over proceedings at the World Takaful Conference held in Dubai earlier this year. As an indicator, we note that no listed UAE takaful company has accumulated a distributable surplus for takaful fund members.
The report noted that in the first quarter of 2013, the takaful fund deficits in UAE rose by over 70 per cent from December 31, 2012, and that in 2012, those same companies saw their fund deficits increase by almost 40 per cent from December 31, 2011.
Excluding new capital introduced to the sector in 2012, UAE takaful companies recorded zero growth in shareholder funds, after providing for the deficits in takaful funds, which the shareholders covered through qard Hassan facilities.
This is in marked contrast to the UAE conventional insurance sector, where total shareholder funds grew by 5 per cent in 2012 (before any new capital injections), with a smaller growth in premiums.
Why is the takaful sector underperforming? The key reason is that it must compete directly with conventional insurance companies that benefit from established economies of scale, have longer service track records, and have more established distribution mechanisms to the marketplace–on balance the conventional insurance sector companies are less intermediary-dependent for their revenue streams.
It would also seem that there is no meaningful uninsured Islamic community that the takaful sector can rely upon to provide business stream–it is already serviced by the conventional sector.
The report highlighted the opinion of many that the GCC insurance markets are now overpopulated with insurers. This is giving rise to overcapacity with the predictable, and expected, response of price competition in the insurance market.
Insurance companies require considerable capital investment to become established, and new, usually small, companies are under pressure to deliver healthy returns to their investors. In the short-tail lines of motor and medical insurance that predominate in GCC markets, under-pricing will become evident very quickly and we believe this is in part evidenced by the poor technical results of the takaful sector.
S&P estimate that in 2012, the takaful combined ratio (loss ratio plus wakala fee expense ratio) in the UAE rose to 115 per cent from 109 per cent in 2011.