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Takaful (Islamic Insurance) growth in recent years


The net income of listed companies in the GCC Islamic (Takaful and Islamic cooperative Tawuni) insurance sector nearly halved in 2017 to $375 million, from $674 million in 2016, according to ratings agency S&P.
The decline in 2017 net income was mainly driven by weaker results in the Saudi Arabian insurance sector and follows an increase in earnings by about 151 per cent in 2016, indicating some considerable earnings volatility in the sector. In S&P’s view, the Islamic insurance sector continues to face secular challenges around relatively concentrated and undifferentiated business models and high expense ratios that leave them susceptible to adverse event risk related to solvency, governance, and accountancy. That said, it is likely that medium-term growth prospects in the sector remain satisfactory given relatively low penetration levels, and we expect Islamic insurance to remain profitable overall in 2018; strengthening capital levels are also observed.
The publicly listed Islamic insurers in the GCC generated an estimated net income of $375 million in 2017, compared with about $674 million in 2016 and $269 million in 2015. The Saudi Arabian market, which contributes about 85 per cent of total GPW, has been the main source of earnings volatility in recent years. While net income in 2016 grew significantly due to rate increases as a result of stricter application of actuarial pricing, 2017 results dropped materially. This was because of additional reserving needs at the largest insurer, and high bad debt provisions at the fourth-largest insurer.
First-quarter 2018 also shows a year-on-year drop in net income of 63 per cent, suggesting that this might be another challenging year. In contrast, the Islamic insurance industry in GCC countries outside Saudi Arabia recorded an increase in net income by about 832 per cent to $82 million in 2017 from $9 million in 2016, and an increase of more than 60 per cent in first-quarter 2018 compared with the same period last year. This improvement was mainly driven by better results in the UAE (the second-largest Islamic insurance market in the GCC contributing about eight per cent of total GPW), as Salama generated a net profit of $10 million in 2017 against a net loss of $48 million in 2016. Year-on-year earnings of Islamic insurers in other GCC countries remained broadly flat in 2017.
While the GCC Islamic insurance sector is expected to remain profitable overall in 2018, there are a number of factors that may affect insurers’ profitability in Saudi Arabia and the UAE, and therefore the overall results.
First, underwriting profits are lower in Saudi Arabia and the UAE because insurers apply no claims and other discounts to motor policies to gain or maintain market share. Second, insurers in Saudi Arabia have been providing additional coverage under medical policies, which may lead to weaker earnings if this business is not priced adequately. Third, the challenge of collecting value-added tax (VAT) from retail clients for policies written in 2017 and into 2018, as well as new accounting standards leading to higher doubtful debt provisions, could see net earnings decline further this year.
In addition to weaker profitability, GPW growth in the Islamic insurance sector has slowed considerably over the past two years. It stood at slightly below $11 billion in 2017, having remained flat year-on-year. This was despite moderate growth in some markets outside of Saudi Arabia.
For example, Islamic insurers in the UAE recorded premium growth of about 15 per cent in 2017 on the back of higher motor rates and an expansion of basic medical insurance coverage in Dubai. Industry-wide, Q1 2018 saw an overall decline in GPW by about three per cent compared with Q1 2017, driven by a 3.7 per cent drop in GPW in Saudi Arabia during that period mainly because of pressure on rates as well as slower consumer spending following the introduction of VAT in January 2018. The departure of a large number of expats from Saudi Arabia over the past year has also resulted in lower premium income. The local authorities’ efforts are expected to tackle the large number of uninsured drivers, combined with the arrival of women drivers in mid-2018 and higher rates for medical business, following the introduction of additional benefits, will support a slight pick-up in premium growth in Saudi Arabia in the medium term. However, this may be offset in the short term by the large number of foreign workers that have already left, or will be leaving in 2018, as Saudisation policies are increasingly enforced.
Total shareholders’ equity in the Islamic insurance sector in the GCC improved by about three per cent to $4.8 billion in 2017, from $4.6 billion in 2016, as a number of insurers retained parts of their profits or raised additional funds through rights issues. The rate of increase in shareholders’ equity exceeds premium growth, which indicates a slight improvement in overall capital adequacy.
However, despite this overall improvement in capital adequacy we still believe there are too many insurance companies in the GCC, and that many of these players lack the scale to operate successfully in overcrowded and highly competitive markets. It is likely that that credit conditions in the sector may weaken over time, if total premium growth remains slow and insurers try to capture market share by further lowering their rates. Local regulators, particularly in Saudi Arabia and the UAE, are expected to remain committed to maintaining market discipline by introducing more sophisticated risk-based regulations.
This may mean that there will be fewer but more profitable insurers in these markets over time, particularly if smaller and weaker capitalized insurers are not able to cope with all the additional regulatory demands.
In Pakistan the Takaful industry is still in a formative phase and market predictions project progress rates between 15 to 20 percent over the coming 10-year, touching US$7.4 billion in premium by 2015 in Pakistan. With problems around client service and productivity, expertise can enable this increasing industry by its formative phase. The country is among the main 10 most populous states globally. This makes it a very fertile market for Takaful, one with some interesting problems.
Truthfully comprehending the opportunities for Takaful industry in the country, we need to see where the current insurance industry stands. The best way to recognize this by comparing it with other states which shares various traits with Pakistan. India, a much larger neighbor, has an insurance penetration of 4.8 percent, against Pakistan’s 0.8 percent, and its insurance density is US$38.40, against Pakistan’s US$5.90. These values make it very clear that there exists an important gap in the country for financial protection instruments. As we know, attaining predictions is not as easy as formulating them.
Recently, Securities Exchange Commission of Pakistan (SECP) has accepted a 4-member Sharia advisory board to oversee Islamic financial products in Pakistan, as the regulator looks to address credibility concerns, which still haunt the industry. It is predicted that the new board would be instrumental in harmonizing the Sharia-related business, operations and structure of the tools of the Islamic capital market in the country.
The SECP first announced it would set up a 9-member supervisory board back in 2013, but since then the Government of Pakistan has overhauled its attempts to promote the industry. Oman’s central bank organized a Sharia supervisory board in last October, with Bahrain and UAE also developing a same state-level approach to the industry.


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