MENA retakaful has long-term growth potential
Source: Middle East Insurance Review | Oct 2020
In its annual commentary released in September on the global reinsurance industry, AM Best said retakaful operators have yet to achieve sustained traction in the MENA region, despite ample opportunities.
Over the past two decades, there has been significant growth and interest in the MENA retakaful market, with many retakaful formations structured as greenfield investments and others formed by large global reinsurers looking for additional distribution platforms. However, AM Best noted that the initial strong momentum has stalled due to inconsistent and underperforming technical results. In recent years, market contraction has occurred with retakaful operators such as Takaful Re and Emirates Retakaful (both from the UAE) exiting the market due to poor performance, driven in part by their inability to gain sufficient scale. The remaining retakaful operators in the region are now primarily branches or subsidiaries of conventional reinsurers, as opposed to standalone retakaful outfits, said the report.
According to the rating agency, factors that are constraining the success of retakaful in the region include the underachievement and small size of the region’s direct takaful markets, and most notably competitive pressure from the conventional reinsurance market. Shariah boards of takaful operators are not taking a strict approach to retakaful enforcement, allowing contributions to seep into the conventional markets, arguing the necessity of policyholder protection. Without tighter regulation and shariah control of ceded contributions, the retakaful market will continue to be overlooked in favour of conventional reinsurers, inhibiting sizeable growth potential.
Despite these downsides, AM Best expects interest in retakaful to persist, particularly if the primary takaful market continues to improve its performance while successfully expanding its footprint, capitalising on a growing target market. The agency said there is renewed interest from conventional reinsurers to establish shariah-compliant operations in the region, notably in North Africa, in response to development in the primary market. While the shape of retakaful capacity offerings remains to be seen, positive dynamics in the primary takaful market suggest the long-term potential of the region’s retakaful segment is good. M