Consolidations loom as UAE takaful firms feel the pinch

New regulations, low margins and a highly fragmented marketplace are leading the UAE’s takaful firms to plan a wave of consolidations, according to experts.

Bigger capital requirements, increasing back-office staff needs, tighter auditing rules, and a desire to achieve real profits mean that small-scale takaful firms need a quick route to growth. With overall double-digit industry growth, new regulatory incentives to merge, and the presence of a large number of small firms making negligible profits, industry analysts envisage a sector ripe for consolidation.

“[Takaful] companies should recognise that at the current scale of their businesses, they should merge, combine balance sheets and create a stronger sustainable platform for business,” said Salman Siddiqui, a financial analyst at the ratings agency AM Best.

In the UAE, margins on Sharia-compliant underwriting are low. Return on equity at UAE takaful companies stood at 0.4 per cent in 2014, according to data from the accountancy firm Milliman. This compares unfavourably with return on equity in Saudi Arabia and Malaysia, which stand at 6 and 14 per cent, respectively.

In 2014, the Islamic insurance industry as a whole ran a net underwriting loss, according to the ratings agency Standard & Poor’s. The value of claims made by policyholders exceeded the fees paid by policyholders by 4 per cent, on average, across the country’s listed takaful firms.

“Fierce competition and fight for market share” drove margins down, S&P said.

Raymond Hurley, director of deals at PwC Middle East, said that most of the takaful firms currently operating in the country are “subscale”.

The presence of “too many players means that each can only have a smaller share of the pie”, he said.

“Every new takaful operator needs to take out of the pile of existing business,” said Irshied Tayeb, head of reinsurance at the Dubai law firm Bin Shabib and Associates. “So for many firms, there’s no growth.”

Several takaful firms have approached the UAE Insurance Authority, the industry’s regulator, to seek permission for mergers, according to Reuters.

“Takaful firms have to grow to become sustainable,” said Ghassan Marrouche, the chief executive of Noor Takaful. “It’s not just the top line, but also the bottom line that counts. In order to be sustainable we have to make positive results on the policyholder fund.”

Mohamed Hussein El Dishish, chief executive of Emirates Retakaful, said: “[Mergers are] the key – the nature of our industry is the law of large numbers. You need to be big in order to absorb losses, and to provide security to clients.”

Under new regulations, takaful firms must hold larger amounts of highly-rated capital, making it harder for firms with smaller balance sheets to comply with the law.

The UAE Insurance Authority has introduced “the single most fundamental change to insurance regulation in the country for a generation”, PwC’s Mr Hurley said, and that, combined with the financial imperative to change, is making mergers more attractive.

“Regulators have made it harder for smaller-scale insurers to remain in compliance – they are nudging takaful firms into combining their businesses with a larger player,” he said.

Unlike a conventional insurer, takaful firms operate as investment fund managers. Policyholders’ equity is reinvested in projects, and returned to policyholders so long as the company makes a profit. Policy claimants are paid out of this fund.

Mergers would “absolutely” be a boon for the ratings of the UAE’s takaful firms, said Michael Dunckley, an analyst at the ratings agency AM Best.”

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