Reuters – Kuwait’s first Islamic insurer was born 14 years ago, but its takaful firms are still struggling in a crowded market that faces cut-throat competition.
This has led to stagnant growth and persistent losses for takaful firms operating in Kuwait, one of the world’s richest countries on a per capita basis, raising doubts about the sector’s long-term viability.
In a market with 32 insurers, takaful firms say they are at a disadvantage to their conventional peers which have operated for decades, allowing them to build solid customer bases and amass large financial surpluses.
While Islamic finance widens its global footprint, Kuwait’s takaful sector could shrink in the next five to seven years, said Abdulrazaq M. Al Wohaib, managing director and chief executive of T’azur Takaful Insurance Co.
“We are moving opposite to the rest of the world – this has reduced the profit margins of these companies.”
Gross takaful contributions in Kuwait grew an estimated 4.3% in 2012 after 4.5% in 2011, among the lowest growth rates for takaful anywhere in the world, a report by consultancy Ernst & Young estimated.
Kuwaiti takaful firms posted a combined 47.4 million dinars ($167.7m) in premiums in 2012, an 18.7% share of the total, Commerce Department data showed. This was spread across 11 locally incorporated takaful firms; many companies in the sector have failed to post consistent profits.
Unlike conventional insurance, takaful is based on the concept of mutuality, where a takaful operator sets up a fund to oversee and manage pools of money contributed by policy holders. Takaful firms are obliged to distribute excess profits to policy holders, unlike conventional firms which account for such surpluses as profits.
But when deficits occur, these must be funded with interest-free loans extended by the firm, which can lead to losses for shareholders, said Hussain Ali Al Attal, chairman and managing director of First Takaful Insurance Co.
Takaful companies argue this puts them at a disadvantage amid intense competition from conventional firms; the country’s six largest insurers command close to two-thirds of the market.
Furthermore, the takaful sector lacks a dedicated supervisory body, leaving an opening for negative competitive practices, Al Attal added.
Price under-cutting by conventional firms aims to drive takaful firms from the market, said Saad Ebrahim Makki, vice chairman and chief executive of Takaful International Co, a unit of Bahrain’s Takaful International.
“It should be competition with you in terms of quality of service and not competing with you in the price, because in the end you and I sell the same service.”
Conventional insurers dispute claims of a price war and instead point to the way takaful companies are run.
“The business model of takaful is not wrong, but the error is in the application. The error is the result of high operating expenses that don’t fit with the revenue,” Ali Hamad Al Bahar, general manager of Kuwait Insurance Co, the country’s oldest insurer, told Reuters.
“Profitability is based on reducing expenses and maximising revenues. Companies that have not been able to achieve earnings and dividends to shareholders did not benefit from this basic rule of business.”
While Kuwaiti insurers generally weathered the global financial crisis, the downturn in 2008 hit takaful firms hardest because of their relative youth and limited financial reserves, he added.
Another criticism of the Kuwaiti takaful sector is that some firms focus not on their core business of providing insurance but on investment, since setting up an insurance company can avoid strict control by the country’s central bank, which oversees banks and investment firms.
Many companies were founded with the aim of “capital investment, no more, no less”, said Makki.
An additional problem is that the sector has only limited access to lucrative contracts from the oil sector, as regulations require firms to be listed on the local bourse to bid for such business, a requirement met by only two takaful firms, said Al Wohaib.
Even when takaful firms can bid for such business, the size of the risks may be too large for them, especially since they lack the backing of a large retakaful industry to spread the burden, he added.
Abdel Hamid El Baaly, head of the Islamic Law Department at Kuwait International Law School, said that ultimately, many of the takaful sector’s problems were linked to the need for clearer, more supportive regulation.
“We need a law to regulate and control the industry’s movements and develop these companies,” he said.
Kuwait’s current insurance law dates back to 1961. According to global insurance rating agency A.M. Best, Kuwaiti regulators have drafted a new insurance law that would feature a separate code for takaful, but the law has yet to be presented to parliament.
The slow pace with which parliament addresses economic policy, partly because of longstanding political tensions between parliament and the cabinet, means it is not clear when the legislation might be passed.
In the meantime, looking abroad may be the only good option for the Kuwaiti takaful firms which can afford it.
The lack of local business opportunities is pushing companies such as First Takaful to explore the Saudi Arabian and Turkish markets in order to diversify their sources of income and gain further experience, said Al Attal.