KUALA LUMPUR: Expansion of the takaful (Islamic insurance) industry is slowing as firms struggle for scale and face growing competition, but the sector is still poised to sustain double-digit growth, according to a report by Ernst & Young.
Takaful, an industry which attracted $10.9bn in gross contributions worldwide last year, has its core markets in the Gulf and southeast Asia and serves as a bellwether of consumer appetite for Islamic finance products.
Driven largely by Saudi Arabia and Malaysia, takaful globally is to grow by 16 percent annually in coming years compared to an average 22 percent rate between 2007 and 2011, said Ashar Nazim, Islamic financial services leader at consultants Ernst & Young.
That would see the industry edge close to $17bn in annual gross contributions by 2015, with Saudi Arabia making up almost half of that figure, the report showed.
But firms have expanded in narrow product segments such as auto insurance which are saturated by competitors, sparking price competition to gain market share, Nazim added. “Unless serious thinking goes into strategising the model and structures, you’ll grow your market share at the expense of profitability.”
A shift from general insurance to more profitable life business remains unlikely in the Gulf because of comfortable government-funded safety nets, with general business commanding a market share of as high as 96 percent in Saudi Arabia. Takaful firms have struggled to control costs because of expanding work forces, and they have lost business to conventional rivals which can underwrite larger risks more efficiently.
Lopsided portfolio allocation is a key problem, especially in the Gulf outside Saudi Arabia where firms invest 25 percent in equities but just 2 percent in the more stable sukuk asset class, the report showed. Saudi takaful firms allocate more to sukuk, 25 percent, but 44 percent is held in low-yielding cash deposits because of regulatory requirements. Reuters
