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Takaful market to grow faster than conventional insurance

The takaful industry, despite the good performance, continues to face challenges in improving efficiencies and reaching critical masses. (EB FILE)

By Shveta Pathak

Islamic insurance (takaful) is estimated to grow to $3.519 billion (Dh12.91) by the end of 2010 in the Gulf and the industry would grow at a faster pace than conventional insurance, while the compound annual growth rate (CAGR) is expected to be 16.1 per cent during 2009-2012 period, said a research report.

Tommy Trask, Executive Director and Head of Industry Research Services, Alpen Capital, said: "Favourable demographics, growth in organised savings, Islamic finance, regulation and increasing affluence would be key contributors to the growth in GCC's takaful industry. It would grow faster than conventional insurance. Within the GCC, Saudi Arabia, UAE and Bahrain have been showing good growth."

Alpen Capital has estimated nominal growth at $3.133bn in 2009 and $3.808bn in 2010.

The industry, however, continues to face challenges in improving efficiencies and reaching critical masses so as to gain from economies of scale. Currently, the largest GCC takaful players are doing that, though a lot more needs to be done in the direction, added Trask.

Healthy growth

In the period from 2006 to the third quarter of 2009, the top-eight GCC Takaful firms registered CAGR of 26.5 per cent compared to 19.2 per cent for their conventional peers, the report said.

"The GCC takaful industry is bucking the trend in the broader economy and continues to grow at a healthy pace. The leading takaful firms in Saudi Arabia, the UAE and Bahrain, have performed relatively well, while those in Kuwait have had a somewhat challenging year in 2009.

"While there are reasons to remain cautious about growth in the near term, we expect the takaful industry to continue to grow faster than GDP (non-oil) for the foreseeable future," it said.

Taking the current macro economic environment and other factors into consideration, Alpen researchers expect the market to grow approximately at nominal CAGR of 20.7 per cent and a real CAGR of 16.1 per cent during 2009-2012.

The industry recorded a strong performance in the first three quarters of 2009, particularly in the third quarter, researchers noted.

Even as the full year performance is expected to be "somewhat weaker", given that local equity markets gave up some of their gains in the fourth quarter of 2009, the industry would continue to grow at a faster pace than its peers in conventional insurance industry, the report said.

"The trend is for the conventional insurers to retain a larger portion of risk, while we see the opposite trend among takaful firms. This may be a sign of the takaful firms increasingly moving into more complex risk categories that requires reinsurance, but could also signal lesser constraint in re-takaful capacity."

Profitability of the takaful firms is primarily driven by investment returns and the performance of local equity and real estate markets. The performance of both takaful and conventional insurers were good in the first nine months of 2009, mirroring the equity market recovery, the report said.

In the first nine months of 2009, the GCC takaful firms ceded around 47 per cent of premiums, compared to only 40 per cent in 2008.

Growth drivers

The key factors driving the growth are regulation, favourable demographics, growing affluence, growth in organised savings and Islamic finance, greater availability of takaful and Islamic finance products and changing consumer habits, said Alpen.

It said that family takaful, or life insurance, is currently under-represented in all of the GCC countries and likely to grow at a relatively faster pace than general takaful.

Alpen noted that takaful regulation is gradually being enhanced across the GCC and this will result in significant changes in how insurance companies are run, particularly in terms of investment strategy, enterprise risk management and governance.

"Last week's increase in the minimum capital requirement for UAE insurance firms is one of many steps in this direction."

Increase in GCC insurance penetration rates is also on account of the introduction of regulation for health and building insurance, greater availability of takaful products and changing consumer habits, it said.

The implementation of mandatory third party motor and health insurance in the GCC has and will continue to underpin growth in demand for general Takaful.

Saudi Arabia was among the first GCC countries to mandate medical insurance for expatriates in January 2006. This was later extended to Saudi nationals. As a result, health insurance in the country has more than tripled since 2006 reaching SR4.805 billion (Dh4.7bn) in 2008, accounting for 44 per cent of the total insurance premiums. All other GCC countries are either planning to or have already taken initiatives in the same direction. Within the Emirates, Abu Dhabi took the lead by introducing mandatory health insurance for expatriates in July 2006 and eventually covered all nationals. Dubai is expected to follow suit, said Alpen.

Young and rapidly growing population in the GCC is another growth driver, the report added.

"The GCC has a young and rapidly growing population, with a median age of 26.3 years. It has been growing annually at 3.4 per cent over the past five years, and is forecast to grow at 2.9 per cent in 2009 to 2012 to reach 42.2 million according to IMF. Some of the contributing factors include a significant decline in mortality rates, an improvement in average life expectancy across the region and a continued inflow of expatriates, albeit at a slower pace than in the recent years."

Affluence levels in the GCC are rising and the average per capita GDP is expected to see a 7.4 per cent growth in 2009. This would further contribute to growth in takaful, said Alpen.

"With an average per capita GDP of $43,650 in 2008, the GCC is one of the most affluent economies of the world. Mainly driven by a sharp rise in oil prices, the overall income levels of residents have more than doubled in the last five years. The average per capita GDP is expected to grow at a CAGR of 7.4 per cent in 2009 to 2012 according to IMF."

Besides, persistent efforts by the GCC governments to diversify their economies away from oil have resulted in high value insurable projects across the region, which goes to the favour of Islamic insurance.

Citing Meed figures, the report said that "currently, projects worth around $2.3 trillion are planned or underway in the GCC with the UAE and Saudi Arabia accounting for about 70 per cent."

Growth in Islamic finance and the number of institutions promoting Islamic finance has boosted takaful growth, it said.

"This is because financing and mortgage products create a natural demand for family takaful, or life insurance. According to Standard & Poor's, Islamic banking assets in the GCC reached $285bn at year-end 2008, amounting to a market share of 22 per cent of total banking assets, compared with less than 10 per cent in 2003 while Ernst & Young says Islamic finance has grown by 15-20 per cent per annum over the last 10 years."

The report highlighted that for takaful to continue to grow there is also a need for attractive regional Shariah compliant investment opportunities with suitable risk, maturity and liquidity profiles.


Takaful industry, that is largely fragmented, is expected to undergo consolidation, the report said.

"The takaful industry is characterised by a small number of large players and a large number of small operators and start-ups. Size is important in this industry and the results for 2009 show that large players are growing faster than the smaller ones and also report stronger earnings."

The report said that like their conventional peers, the takaful players are highly exposed to asset risk, with equities and real estate accounting for about 72 per cent (median) of investments.

"Consequently, earnings of the sector are largely driven by the performance of local equity and real estate markets, very much at odds with norms and practices in more developed and regulated insurance markets. Insurance regulation is gradually being enhanced across the GCC and we believe this will result in significant changes in how insurance companies are run, particularly in terms of investment strategy, enterprise risk management and governance," said Trask.

According to the report, Saudi Arabia is the largest market, accounting for approximately 79 per cent of gross takaful contributions in 2008. The company for co-operative insurance (tawuniya) is the largest player with roughly one quarter of the GCC market. All other players account for less than six per cent of the market, the report said.

"Not only are the incumbent takaful players growing, but there are also many new entrants to the industry. Over 30 new takaful operators have been established in the GCC countries in the last three years, with a total paid up capital in excess of $2bn. This includes Saudi-based operators that previously conducted business in the country under a conventional structure, but excludes new takaful windows.

Some of this capital is still to be put to use as the Takaful businesses needs some time to develop," the report said.

Among the issues that the Islamic insurance industry stands exposed to, Alpen said, are a relatively constrained choice of Shariah compliant assets and high asset risk exposure.

"Over the last three years, GCC takaful companies have exhibited higher expense ratios than their conventional counterparts mainly due to lack of economies of scale and comparatively lower use of technology. The ratio is moving in the right direction however, with the median below 90 per cent mark for the first time in the first nine months of 2009," said the report.

It added: "The takaful players are somewhat constrained in their choice of Shariah compliant assets. Typically, assets include listed equities, short-term placements with Islamic financial institutions (Mudaraba or Wakala) and real estate. The GCC conventional insurers, on the other hand, have a more diverse choice including bonds, placements with conventional banks, money market and index funds, private equity."

The industry also needs to generate more awareness, said Trask. "On awareness front, companies are making efforts but a lot more needs to be done. There is a need to promote takaful products."

High asset risk exposure, the report added, is a bigger issue for the incumbents than for the more recently established takaful operators. "We expect investment profiles to change significantly over the coming years in response to the adoption of more sophisticated regulation with capital requirements based on both insurance, counterpart and asset risk exposures."

Takaful players are comparable to their local conventional peers, but below their global conventional counterparts, Alpen noted in the report.

"Good governance and transparency standards are a key requirement for most retail as well as institutional investors. According to the International Financial Corporation sound corporate governance practices increases valuations by 20-30 per cent, result in higher credit ratings and improves access to finance."

The report said compared to conventional players, who have almost 10 years of historical information available, in case of Takaful players only about three years of historical financial information was available. "This is a function of the relatively short life span of many of the takaful players," it said.

Besides, not many takaful players appear to have a dedicated investor relations department to handle investor queries, the report said.


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