Retakaful growth expectations disappoint

The increasing appetite for Islamic insurance has led many investors to view the retakaful sector as a growth opportunity, but retakaful players have recently run into difficulty or have exited the market, according to a report by AM Best.

Retakaful is the Islamic alternative to the conventional reinsurance. Takaful can be defined as a co-operative or mutual insurance, because members of a takaful company join in contributing a certain sum of money as their subscription to a common pool; losses are divided and liabilities spread. Takaful can be structured as either a mudaraba (profit-sharing) model, a wakala (agency agreement) model, or a combination of both. The financing of takaful funds are subject to Sharia compliancy.

Since the early 2000s, there has been an influx of new retakaful formations, mainly across countries in Asia Pacific and the Middle East, according to the Best’s Special Report titled “The Struggle for Retakaful as Competition Bites Sector.” However, in general, success has been limited, with a number of retakaful companies exiting the market in recent years. This has been primarily due to the poor quality of business underwritten, which has led to underperformance of their portfolios.

“The operating environment for retakaful companies is challenging as these operators compete against more established conventional reinsurers in a soft market environment,” said Mahesh Mistry, senior director, analytics at AM Best. “The sustainability of the retakaful model is likely to be tested over the coming years and it remains debatable whether it can be seen as a viable alternative to conventional reinsurance over the longer term.”

The traditional retakaful operator has struggled to gain traction in a highly competitive reinsurance market because of the limited access to quality business, predominantly resulting from the underperformance of the primary takaful sector. The success of the retakaful model is intrinsically linked to that of the primary takaful market, and most takaful operators have struggled to differentiate themselves from conventional insurers.

While retakaful operators have generally been well-capitalised, issues largely pertaining to performance have resulted in capital erosion for the sector and downgrading of the creditworthiness of these institutions. The report states that without being able to achieve the necessary scale, retakaful operators are likely to continue to struggle to operate successfully in the reinsurance market.

Aneela Mather-Khan, financial analyst, added: “Whilst the outlook for the retakaful sector may appear bleak, AM Best notes that there are some operators that are swimming against the tide and successfully managing their retakaful operations – particularly in the African market. AM Best does believe that retakaful still has a future, with branches and subsidiaries of conventional reinsurers achieving some success.”

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