With optimistic growth figures expected in the medium term, Qatar and the GCC can’t overlook the untapped potential of the Takaful market. The Islamic insurance sector has made significant contributions to the overall Islamic finance industry, with noteworthy growth in momentum in GCC countries like Saudi Arabia and UAE.
Qatar is not far behind – the takaful insurance market has emerged as one of the key markets in the Middle East Islamic financial services industry. “The gross written premiums of the overall takaful insurance industry in the country grew at a compound annual growth rate of 51.13 percent during the review period, to reach the value of QR 995.6 million (USD 273.8 mn) in 2011,” explains General Takaful in an interview with bq and adds: “This positive growth rate dynamic surpassed that of the conventional insurance industry, which is encouraging financial institutions to penetrate the industry with similar types of products.”
The major drivers observed for continuous growth in the insurance industry include rapid economic growth, regulatory initiatives such as compulsory insurance policies, government expenditure on infrastructure, and product awareness campaigns conducted by the government. “Overall, the gross written premiums in the Qatari takaful industry are expected to grow at a CAGR of 16.49 percent over the forecast period, to reach QR 2.1 bn (USD 585.2 mn) in 2016,” says General Takaful.
According to them, total gross premium of five listed insurance companies stood at QR 5.1 bn in 2013, making up 0.7 percent of Qatar’s GDP. Combined assets rose to QR 21.9 bn from QR 16 bn the previous year. Qatar Central Bank’s (QCB) ‘Financial Stability Review’ observed that the sector was growing in step with the economy.
One of the five firms ensured that as a group, profits amounted to QR 3.1 bn. QCB did not identify the firm in its report. Nine insurance firms operate in the country. “The five not taken into account by the QCB are branches of foreign insurance firms. A further 26 companies are licensed and regulated by the Qatar Financial Centre Regulatory Authority,” adds General Takaful.
In terms of advantages for policy holders – families and individuals – industry sources claim nothing can beat an Islamic insurer in retail insurance schemes. Until the early 2000s when Qatar Islamic Insurance Company (QIIC), the lone Islamic insurer in the country at the time, popularised its retail schemes, few people knew the advantages retail schemes of Shariah-compliant insurers carried for individuals and families. Returns on investments made by Islamic insurers from the premiums collected are shared with policy holders.
In the year 2000, for instance, for the sixth successive year, the QIIC shared surplus with the policy holders. The sharing ratio was 10 percent in the year. Years later, in 2013, the company shared surplus with its policy holders to the tune of 20 percent of the premiums written the previous year (in 2012).
Islamic insurance firms operate on the cooperative principles of Islam and shareholders in such companies enjoy no rights over insurance operations assets like the premiums and profits. They act only as agencies and are entitled to be paid only a fee in lieu of the services they provide.
The takaful industry in the GCC is faced with several challenges like a highly competitive market environment, lack of skill, operational setbacks and more. In order to achieve a successful Islamic insurance ecosystem, the industry needs to address these obstacles.
The GCC also suffers from low penetration rates. Despite the GCC being the largest Takaful market, the regional industry has not really flourished in all six states. According to S&P estimates, the takaful sector in the region barely generates a little over 10 percent of total market premiums.
Medical and motor insurance are seemingly the most popular segments and fierce competition makes it difficult for smaller companies to earn much. Takaful companies are usually smaller, and this leads to their expense costs weighing on their profitability, life savings products still being undeveloped.
Expatriates are more likely to invest in their home countries, both in banks and in insurance schemes, even if they are based here for decades on end. “No expatriate even uses a local bank for savings. Such is the situation,” rues General Takaful.
According to General Takaful, all general classes of insurance are doing well other than individual life products. The company says that the only popular scheme in the retail segment is Credit Life, which is after all compulsory for all bank loans. Credit Life is the premium one pays for a personal or car loan taken from a bank.
The credit provider has, in fact, a contract in place with an insurer for Credit Life. The segment has indeed grown as the population has multiplied and so have bank loans, both personal and for cars. One reason why the penetration of retail insurance remains low in Qatar, according to industry operators, is because of the huge expatriate population. Of an estimated over 2.22 million people, according to January 2015 population figures, more than 85 percent were expatriates.
An official from Beema explains what contributes to growth of the industry: “It depends on how technical you are. If you have qualified people in your company – engineers who are certified by the insurance sector and certified underwriters to estimate the risk – the quality of people puts the company in a better position. In the motor sector we analyse car, make, model and where it costs us more. Every quarter we review that!”
According to a recent report from EY, Global Takaful Insights 2014, profitability of takaful companies has been threatened not just by undifferentiated strategies but also by the lack of uniform regulations that will allow them to operate across different models. Undifferentiated business strategies mean most takaful operators are competing intensely and this is likely to squeeze out the under-performers. With this kind of competition, takaful operators are going to experience some difficulty in the medium term, according to EY.
Speaking specifically, Beema elaborates more on the challenges faced by this sector in Qatar: “It depends on the model. If your model includes ‘wakala’ fees, you are pressured or controlled by the fees you are charging. That fee is what will cover your expenses and this is an impediment to expansion. We can’t expand fast like the conventional insurers. If the market has an intention to move in the direction of Islamic insurance, that’s when we can look at higher growth numbers.”
Smaller companies have the options of looking at alternative consumer segments and also considering mergers and acquisitions. “In striving for scale and profitability, operators are looking at structural transformation around risk, pricing and cost efficiencies,” quotes EY in their report. “Given the strong underlying market opportunities, competitive market environment and regulatory reforms, getting the industry’s “house in order” is paramount to achieving a sustainable takaful ecosystem.”
For industry operators, it’s essential they focus on dynamic and emerging customer trends, to realign their business and strategic directions. Business volume is key, and operators must focus on increasing that. One way to do that is diversifying their offerings and attracting various types of customers, in larger numbers.
To move forward, operators must “gear up for new solvency, accounting and regulatory reforms,” states the EY report. Finding the balance to meet stricter solvency requirements versus economic capital and managing risk volatilities are part of this process.
In order to push the growth momentum in the takaful industry, operators and industry facilitators including regulators and standard setters must focus on the standardisation of regulatory and Shariah framework. The framework could include standard takaful models to remove barriers to cross border operations and M&A activities, according to EY. The report also states: “Standard-setting bodies of AAOIFI and IFSB can develop a convergence roadmap for regulators, operators and Shariah scholars.”
Despite intense competition, there is potential for growth, especially in the areas of family Takaful and medical insurance, particularly in rapid-growth markets like UAE. Saudi Arabia is likely to be a core market for Islamic insurance business, commanding as much as 50 percent of the global contributions. GCC countries like UAE, Qatar and more recently, Oman (with its recent draft regulations and launching a Shariah compliant index for investors seeking Islamic equities on the Muscat Securities Market), will continue to set the pace for the development of Takaful products for the GCC and the Middle East.