The standalone retakaful model may be under threat over the long term unless it is repositioned to add additional value to the reinsurance market, said A.M. Best.
Retakaful is faced with a challenging environment in a highly competitive reinsurance market, said the ratings agency, adding that Islamic reinsurance would have to be supported and enforced by specific regulation in target markets and the respective push of Shariah boards.
The global retakaful market is very much concentrated on Southeast Asia and the Middle East. Since retakaful became more established in the early 2000s, new companies have entered the market, but their success has been limited for a couple of reasons, said A.M. Best. A number of players have recently run into difficulty or have even exited the market.
“Traditional retakaful operators have 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,” said Mr Mahesh Mistry, Senior Director of Analytics at A.M. Best.
“The operating environment is challenging as these companies compete against more established conventional reinsurers in a soft market environment. 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,” he added.
Compared to the conventional sector, the retakaful market generally suffers from weaker technical and operating performance with high expense ratios which is unhealthy for balance sheets in the long run. The most successful companies are those able to underwrite a balanced portfolio of conventional and takaful business, whilst those that have sought to only provide cover to takaful operators have generally suffered, which makes a case for retakaful windows of conventional insurance providers.
The most important requirement for retakaful operators to gain a firm stand in the sector is the ability to attract good quality business, the report said. This is also related to how retakaful companies successfully and convincingly differentiate themselves from conventional peers on the market.
“Retakaful operators therefore remain in direct competition with local and international reinsurers. Moreover, the ability of retakaful operators to attract quality risks is further limited by their narrow scope, providing Shariah-compliant solutions predominantly in the Middle East, Asia and Africa,” Mr Mistry said.
Competitive edge
Retakaful currently has the best future in branches and subsidiaries of conventional reinsurers providing them an additional revenue stream, said the agency.
“Retakaful operators that are subsidiaries or branches of larger international reinsurers are operating relatively successfully. The main factors behind this include their ability to take advantage of the economies of scale of the wider group, and to leverage the rating of the group. This can give them access to higher-quality business, and enable them to grow their margins and achieve sufficient economies of scale,” he noted.
It is estimated that the entire business volume for retakaful operators globally does not exceed US$1 billion in contributions, while the global reinsurance market was valued at close to $600 billion as at the end of last year.
The lion’s share of ontributions is generated by Southeast Asia – mainly Malaysia and to some extent Indonesia and Brunei, as well as the six GCC nations.
Recently, operators in African countries have entered the market and are doing surprisingly well “by swimming against the tide and successfully managing their retakaful operations”, said Ms Aneela Mather-Khan, Financial Analyst at A.M. Best, but they remain still small in size and scope. M