Saudi Arabia’s, Malaysia’s takaful markets thrive

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The Saudi Arabian and Malaysian cooperative and Islamic insurance (takaful) markets are the only two that are seeing growth especially in new policies and profitability.

In a damaging report, Global Takaful Insights 2013, international accounting and advisory firm, Ernst & Young has warned that apart from Saudi Arabia and Malaysia, “most other takaful markets and smaller Takaful operators appear to be struggling.

Our discussions with industry executives suggests that too many operators are pursuing an insufficient number of risks to increase their gross written contributions (GWC).”

The report added that not all takaful operators would gain market share at the right price to be profitable — and those that do will struggle to satisfy what have been very patient shareholders.

The compound annual growth of GWC, according to Ernst & Young, decreased to an alarming 16 percent in 2012 from 22 percent year-on-year from 2007 to 2011.Saudi Arabia uniquely operates a cooperative insurance model, which is Shariah-compliant.

The Saudi Arabian Monetary (SAMA), which is the insurance industry regulator in addition to being the central bank and banking regulator, directed all insurance operators in the Kingdom to align with the cooperative insurance model of by year-end 201. As such Takaful operators had to adjust their internal accounting structures, remove the use of wakala (agency) and qard (benevolent loan) and amend product terms conditions.

This shift away from the pure Takaful model and regulatory harmonization has had a significant impact on the Saudi insurance industry, which is huge by the Takaful market standard, said Ashar Nazim, Global Islamic Finance Leader at Ernst & Young and Rauf Rashid, Country Managing Partner, Ernst & Young Malaysia. “The two biggest markets (Saudi Arabia and Malaysia)have considerably higher populations and GWC per operator — with profitability increasing through a combination of scale, risk diversification and improvements in claims and expense ratios,” the report noted.

The Kingdom and Malaysia had an average gross contribution per cooperative insurance/Takaful of $145m in 2012. Saudi Arabia by far has the most insurance operators - 34 cooperative insurance operators compared to Malaysia’s 11 takaful operators. Saudi Arabia’s cooperative insurance contributions is forecast at $5.645 billion for 2012 and projected to increase to $6.352 billion in 2013 and $7.149 billion in 2014.

This compared to a forecast of $2.721 billion for ASEAN in 2012, $3.296 billion in 2013 and $3.993 billion in 2014. This makes the Kingdom the single largest Islamic insurance market in the world.

Malaysia has emerged as the world’s largest family (life) takaful market.

With a proven model and regulatory clarity, the country is set to further build on this leadership position, added Ernst & Young. Malaysia is the most developed Islamic finance industry including the development of the sukuk market, and successive governments have proactively supported the growth of its Takaful sector.

Malaysia currently holds a 71 percent share of ASEAN (Association of South East Nations) Takaful contributions. In 2012, Malaysia’s Takaful industry grew strongly by 21 percent.Malaysia earlier this year brought into law the Islamic Financial Services Act (IFSA) 2013, which requires takaful operators to separate their life and general (motor and fire insurance) business and to have a minimum capital of RM100m ($30.1m).Moreover, new laws governing Malaysia’s Islamic finance sector, added the Report, will boost protection for depositors by making religious advisers legally accountable for financial products, and liable to steep fines and imprisonment.

Improved customer understanding and pricing could significantly enhance shareholder value for these operators in the future.

According to the report, family and medical insurance dominate the business lines, with this segment accounting for 50 percent of the market in the ASEAN and 47 percent of the market in the MENA region. Motor insurance accounted for 27 percent and 25 percent respectively. The remainder of the market was made up of property and marine and aviation insurance.

The takaful industry is largely concentrated in specific markets and in limited segments and business lines. This suggests future opportunities to explore latent new markets.

In the near to medium term, traditional growth markets, including Saudi Arabia, UAE and Malaysia, continue to ride on favorable market conditions and a young demographics structure.

In terms of the financial performance of Saudi and Malaysian operators, the latter have the highest return on equity of 13 percent in 2012 compared with 4 percent for Saudi Arabia. The claims ratio was also bigger in the Kingdom at 69 percent compared to 62 percent for Malaysia.

“In Saudi Arabia, the claims ratio has been deteriorating over the last three years mainly due to increasing claims from the motor and health insurance businesses. In 2012, the property or fire insurance business recorded a hike of nearly 47 percent in claims paid,” said the report.

Recent growth in the GCC insurance market has been underpinned by government-driven mandates, particularly for medical insurance. As a result, entirely new markets have emerged in both Saudi Arabia and Abu Dhabi, creating an unprecedented opportunity for insurers and takaful operators alike. However, warns Ernst & Young, these opportunities do not come without risks and competition has rapidly intensified in a nascent, untested and evolving marketplace.

Ernst & Young concludes that given that Saudi Arabia’s population is under-insured by international standards (only 0.75 percent penetration rate), with a population of 28 million and a moderate annual GDP growth rate of 4 percent between 2013 and 2015, there appears to be potential for modest growth. The growth of family takaful, however, may be limited by Saudi Arabia’s social welfare system, which for the most part is considered generous.

The Kingdom’s gross cooperative insurance contributions is forecast to reach $5.8 billion in 2013 and $6.7 billion in 2014.

Saudi Arabia is seen as having the largest domestic market for nonconventional insurance with opportunities in health insurance; life insurance especially for expatriates; and to cover big ticket risks relating to the large infrastructure projects in the Kingdom. However, Saudi cooperative insurance operators lack scale to compete for the big ticket risk business; and the sheer competition in the market has meant artificially low prices; and the fact that market growth has largely been to the introduction of compulsory medical insurance.

This article was first published in the Saudi Gazette.

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