A.M. Best: Takaful Operators Struggle With Fierce Competition, Profitability

The significant premium growth in the global takaful sector is expected to continue and reach USD$20 billion by 2017, with the majority of that increase originating from Malaysia and Saudi Arabia, according to a new A.M. Best special report.

The Best’s Special Report, titled “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 reportcontains an analysis of 14 Gulf Cooperation Council takaful operators and 24 conventional insurers in the United Arab Emirates (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 percent in 2013, compared with 20 percent for the UAE conventional market.

“Given the huge global Muslim population, A.M. 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.

Yet a number of challenges remain, according to A.M. Best, 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, the Best’s report said.

Source: A.M. Best Company