Competition, claims weigh on takaful profits

Sector faces flat premium growth as digitalisation costs rise in GCC

The profits of the Islamic insurance (takaful) providers are under pressure as claims rose after last year’s pandemic-induced lockdowns and premiums are held back by stiff competition, according to rating agency Moody’s.

Data compiled by Moody’s show GCC takaful insurers’ aggregate net income for H1 2021 was 36.5 per cent lower than in the same period last year.

“Although in aggregate the sector still posted a $260 million net income, the decline over H1 2020’s $411 million reflects a 12.4 per cent increase in incurred claims as normal claims activity resumed after a sharp decline during last year’s pandemic-induced lockdown, as well as the adverse impact of price competition on premium growth,” said Mohammad Ali Londe, Vice President — Senior Analyst.

Higher claims

The increase in claims pushed up the takaful sector’s loss ratio (claims as a percentage of premiums) to 78.7 per cent at the close of first half of 2021 from 74.9 per cent at yearend 2020, and 70.3 per cent at H1 2020.

Stiff competition in the industry has impacted insurance pricing which, analysts expect will further pressure the sector’s profitability. “We expect competition to pose continued profitability challenges for the takaful sector. Other headwinds include the adverse impact of low interest rates and volatile financial markets on investment income,” said Londe.

GCC takaful insurers’ small average size makes them prone to fierce price competition. This is a key reason why GCC takaful premiums have grown by just 1.7 per cent over the past five years, lagging behind the overall market growth rate of 2.8 per cent.

The GCC takaful sector’s combined premium revenue rose by just 0.5 per cent in H1 2021 compared with the same period of 2020, held back by intense price competition. This masks some stronger performances at national level, with H1 premiums in Saudi Arabia, the region’s dominant takaful market, expanding by 3.2 per cent.

“We believe growth prospects in the GCC region remain favourable, reflecting a steady widening of mandatory medical cover and growing demand for health insurance post Pandemic,” said Londe.

GCC takaful operators, which focus on retail lines, have benefited over the last five years from the introduction of compulsory retail cover and will continue to benefit.

Digitalisation and M&A

The GCC takaful industry stepped up its investment in digitalisation in response to the coronavirus pandemic, which encouraged consumers to buy insurance online.

“We foresee that many small takaful players will seek M&A opportunities to spread the cost of this investment, and to meet increased capital and other regulatory requirements, particularly in Kuwait, Saudi Arabia and the UAE,” said Londe.