The UAE Takaful sector is not "performing effectively" for its policy holders in generating fund surpluses nor its shareholders in the generation of profits, said Standard & Poor's (S&P) in a recently published report.
Despite a 15% growth in contributions in 2012, takaful fund deficits have increased – rising by 70% in the first quarter of this year from the end of 2012 and thereby weakening the sector’s financial strength.
“Excluding new capital introduced to the sector in 2012, UAE takaful companies recorded zero growth in shareholder funds, after providing for the deficits in takaful funds, which the shareholders covered through qard hassan facilities,” S&P said in its report.
“This is in marked contrast to the UAE conventional insurance sector, where total shareholder funds grew by 5% in 2012 (before any new capital injections), with a smaller growth in premiums,” it added.
S&P said the reason for the under-performance is that takaful companies are competing directly with conventional insurance companies that benefit from established economies of scale, have longer service track records, and have more established distribution mechanisms to the marketplace - on balance, the conventional insurance sector companies are less intermediary-dependent for their revenue streams.
It would also seem that there is no meaningful uninsured Islamic community that the takaful sector can rely upon to provide business stream as it is already serviced by the conventional sector, it said.
On the positive side, S&P believes the UAE and Kuwait insurance markets could deliver relatively strong growth in new premiums in the coming years, a reflection of these states' growing economies. The challenge for takaful insurers, as for any new insurer, is to attract and sustain a well-priced volume of stable business at a scale sufficient to cover their cost bases.