Relatively low level of Takaful (Islamic insurance) penetration in theGulf Cooperation Council (GCC) is hurting the industry in these markets while favouring the growth prospects of other markets like Malaysia, according to global rating agency Standard & Poor's.
Even though the GCC is the largest takaful market, the industry has not truly flourished in any of the six GCC states, even if we treat the Saudi market as wholly takaful.
"In the GCC, only five takaful companies in our portfolio of 16 generated fund surpluses in 2013, and none of the five were based in the largest GCC insurance market, the UAE. No GCC takaful company paid hibah (dividends/gifit) to fund members and overall shareholder funds declined for the sector in 2013," said Kevin R Willis, Primary Credit Analyst at Standard & Poor's.
In Malaysia, insurance penetration is four times higher than the average level in the GCC. Malaysians spend twice as much per capita on non-life risk protection as their peers in the GCC region.
Although there are many structural differences between the two insurance markets, Standard & Poor's considers insurance penetration (premiums/GDP) to be key to Malaysia's success. In addition, the Malaysian insurance market is dominated by life savings, a line of business that has hardly started to develop in the GCC region.
According to S&P estimates, in the GCC, takaful sector generates little more than 10 per cent of total market premiums. The sector is dominated by medical and motor insurance and the provision of life savings products is still undeveloped in the region. Fierce price competition makes it difficult for insurers, particularly smaller companies, to generate earnings. Because most takaful companies are small, their expense costs weigh on their profitability.
Return on assets
In the 2011-2013 period, takaful funds suffered a net deficit of 7 per cent of net contributions (premiums) earned, on a deteriorating trend; similarly, analysts estimate losses of more than 2 per cent on fund assets. Of the 48 takaful funds in the GCC, only 19 (40 per cent) produced any fund surpluses.
GCC operators' performances show a three-year return on equity of 6 per cent and a return on assets of around 5 per cent (before provisions for fund deficits). "This compares unfavourably with the GCC's conventional insurance sector, where companies typically generate underwriting profits and stronger returns for investors. We estimate GCC conventional insurers generated an average return on equity of about 10 per cent in 2011-2013," said Willis.
In comparison Malaysian Takaful companies paint a contrasting picture. From 2011 to 2013, Malaysia's takaful funds achieved an average surplus of 32 per cent of net premiums earned, and an 8 per cent surplus on assets. Of 51 separate fund years in 2011-2013, covering life and general business, fewer than 10 per cent recorded any deficit.