Dubai: The enhanced regulatory environment across GCC is expected to result in a surge in costs associated with the implementation of the regulations impacting the profitability of takaful players hard, especially the smaller players.
Implementing the existing regulatory developments will raise costs because of the need to hire expertise, combined with the administrative costs related to meeting the requirements for listed companies.
“We consider that introducing measures to align local regulations may mitigate some of the costs related to adopting the various regulatory requirements and would encourage insurers to focus on capital management and improve pricing discipline,” Ali Karakuyu, an analyst at Standard & Poor’s, said.
According to S&P profitable insurance companies in the GCC region (mostly large, conventional insurers) tend to rely on group medical business or policies that provide significant commission income from reinsurers. Only a few major local insurers can access this profitable commercial business; the smaller players, including the takaful companies, do not have a track record of servicing such contracts and lack the capacity to do so.
This leaves all the small players in the region, including takaful companies, reliant on retail business — mostly motor — sourced from agents charging high commissions.
“We consider that few companies will be able to build a credible business or financial profile from retail business alone, without a cost-effective distribution channel. Furthermore, we find that smaller insurers’ competitive and capital positions are more susceptible to one-off failures,” Karakuyu said.
Analysts say expense ratios of takaful players could rise even higher when additional fees charged by shareholders to manage the policyholder fund (wakala fees) are added. Shareholders at some companies are charging between 15 to 20 per cent of the gross premium (known as gross contributions).
Compared with more-developed markets, the GCC region’s insurers have high tolerance for high-risk assets. The new regulations include limits on the use of such assets, which could mean lower, but more stable investment returns for some players. In Kuwait, insurers must now hold a higher ratio of liquid assets, sufficient to cover their technical liabilities. Although the UAE still permits significant holdings in equity and real estate, which are considered as high-risk assets, liquid assets must cover gross technical reserves. In a market that makes heavy use of reinsurance, liquid asset coverage is considered a prudent measure.
Analysts say in the context of rising costs and competitive pressures, key shareholders may reconsider their long-term commitment to the takaful sector. Some of them entered the industry to maximise the returns on their real estate and equity holdings. In effect, in many cases board members consider underwriting performance secondary to investment performance. Weak technical profitability was not seen as a key threat to the capital base.
“While core shareholders have not yet indicated that they are considering selling their stakes, we see increasing evidence that they are less willing to inject more capital to help takaful providers meet the enhanced regulatory requirements, given their generally marginal results,” Karakuyu said.
“Family ownership of takaful providers remains one of the main obstacles to mergers and acquisitions. High market valuations, relative to book value, also reduce the incentive to merge, especially in Saudi Arabia.
(Gulf News Banking / 26 July 2015)---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com