Profitability is becoming increasingly concentrated among larger takaful operators, highlighting structural challenges for smaller firms, according to the "Islamic Financial Stability Report 2026" released by the Islamic Financial Services Board (IFSB).
Profitability is becoming increasingly concentrated among larger takaful operators, highlighting structural challenges for smaller firms, according to the “Islamic Financial Stability Report 2026” released by the Islamic Financial Services Board (IFSB).
In the GCC, larger operators were able to absorb cost pressures and maintained positive, albeit reduced, profitability, while smaller peers collectively shifted into significant losses.
The report added, “This divergence reflects the advantages of scale in managing claims inflation, pricing pressures, and rising regulatory compliance costs. Smaller operators, with limited capacity to spread these costs, face persistent profitability constraints that cannot be addressed through pricing adjustments alone. These dynamics point to increasing consolidation pressures, with a higher likelihood of mergers or market exits in the near term.”
Meanwhile, increased dependency on qard in several markets reflect structural pressures on underwriting performance and raises risks of capital impairment. Across most jurisdictions, policyholder risk funds were unable to cover deficits from their own surpluses, increasing reliance on qard from shareholders. Increases in claims cost, particularly in medical and motor lines, drove deterioration in underwriting performance in regions where contribution adjustments lagged.
Persistent deficits suggest that pricing, cost management, or risk selection decisions taken on behalf of policyholders have not preserved the fund’s capacity to meet obligations from its own resources and raise concerns about the adequacy of fund management. Standard solvency ratios, which aggregate shareholder and policyholder positions at the entity level, may obscure these vulnerabilities until deficits in the policyholder fund materialise.
Tightening underwriting margins
Underwriting margins have tightened as claims costs outpaced contribution growth, with the net combined ratio increasing across most regions. Motor and medical segments faced the highest margin compression. Premium inadequacy was most acute in GCC motor lines, where sustained below-cost pricing, driven by market-share competition, eroded technical margins and contributed to the deterioration in combined ratios observed across the segment. Medical inflation substantially outpaced contribution adjustments in East Asia and Pacific (EAP), South Asia (SA), and the GCC. Macroeconomic conditions added further pressure in several markets: currency devaluation raised replacement costs for imported vehicles, spare parts, and medical equipment in parts of Sub-Saharan Africa (SSA), and elevated living costs across SSA and EAP weighed on demand, reducing uptake from households and small enterprises.
Against the backdrop of tightening underwriting margins, increasing reliance on investment income and weaknesses in calibration of management (wakalah) fees are leading to emerging risks to profitability across markets. In highly competitive markets, management fees were compressed to levels that may be insufficient to cover operating expenses, placing pressure on operators’ expense ratios and increasing dependence on investment income to maintain overall profitability. This has introduced earnings volatility and increased vulnerability to changes in market conditions affecting investment returns. On the other hand, in some markets, elevated wakalah fees may distort the allocation between shareholders and policyholders by reducing the share of contributions available to the risk (policyholder) fund. This can weaken the financial position of the risk fund, potentially leading to higher deficits and increasing reliance on qar? from shareholders to meet claims obligations, which, while supporting short-term solvency, places an additional burden on future profitability through delayed recovery and capital strain.