Earnings of Islamic Insurers to Remain Weak

Two recent reports from rating agencies highlighted the challenges facing the Takaful industry.

S&P said in a report looking at the GCC region, earnings of Islamic insurers will remain relatively weak and unevenly distributed as their small size, short track records, and retail focus work against them. Most takaful players in the region are still relatively small compared to conventional peers, and are disadvantaged by limited track records and less diverse books of business, particularly given falling oil prices and stricter regulations in GCC insurance markets.

“For a number of companies operating in these overcrowded markets, we find that precipitous growth, combined with net losses, is eroding their capital strength and damaging their credit profiles,” the firm said.

Another factor limiting growth is overcapacity in the region’s insurance markets, which can trigger aggressive price wars.

“In our opinion, Islamic insurance companies require considerable capital investment to become established, yet relatively new companies often come under pressure to generate profits and deliver healthy returns to their investors,” the firm explained.

Growth Slows

Growth in the Takaful sector is slowing stated rating agency Moody’s in a report entitled “Islamic Finance; Prospects Remain Strong despite Subdued Sukuk Issuance”. Moody’s expects Takaful growth to remain at double digit levels into 2017 and for gross contributions to reach $20 billion by 2017.

“Complex regulation, as well as compliance and operational challenges have slowed growth in the Takaful industry,” explains Mohammed Ali Londe, Assistant Vice President — Analyst at Moody’s Insurance team. “Growth has broadly slowed to below 15% in 2015 in most key markets. Globally, year-on-year growth stayed just below 20% in the past couple of years due to large premium increases in the Saudi market in 2015 of around 19%.”

Concluding its report, Moody’s state efforts by government agencies and central banks, combined with retail customer demand, will drive growth for the Takaful sector, as well as for the entire Islamic Finance industry, a trend expected to continue well into the next decade.