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News & Events >> Takaful:Return on equity higher in Saudi takaful sector

Date: 15 April 2015

The return on equity in the takaful sector in the UAE is about 0.4%, compared to 6% in Saudi Arabia and 14% in Malaysia, around 400 participants of the lOth Annual World Takaful Conference have been told.

Mr Safder Jaffer, the Managing Director and consulting actuary at the international actuarial and consulting firm Milliman, cited these figures as he pointed out that the issue is principally one involving the business models adopted by the UAE's takafu1 companies, reported The National newspaper.

In Saudi Arabia, companies operate using a mudarabah contract, under which the insurer and the policyholder share the risks associated with a policy and the profits from invested premiums. In the UAE, by contrast, companies typically adopt the wakalah model, in which policyholders pay a fee to insurers in exchange for insulation from risk.

"The cooperative model has worked and has continued to work," Mr Jaffer asserted, citing Saudi Arabia,s more profitable takaful industry. Saudi companies have stronger incentives to cut costs, while UAE companies set high prices and have high costs, eating into margins and revenues. Regulatory enforcement is also stronger in Saudi Arabia, which is good for the books of takaful companies, he said.

In addition, the majority oftakaful business in the UAE focus on health and motor insurance-areas in which the conventional product offering is both popular and highly competitive. In these markets, '1akafu.l firms offer no unique value proposition, so they are fighting [conventional insurers] for the same market share/' said Mr Jaffer.


Mr Lakhdar Moussi, a consultant who advises the private equity fmn PineBridge Investments Middle East, said: "You cannot talk of an industry that is concentrated on one or two market segments. To [underwrite] aviation and engineering, you need to be of a minimum size."

The inability to underwrite big premiums means takaful fums lose business.

"You need companies which are able to take responsibility for big risks," Mr Moussi said.

Bigger insurers also tend to be more profitable, as risk management becomes easier. In Saudi Arabia, the three largest Shariah-compliant insurers collect more than 50% of takaful premiums and earn 75% of the industry's profits.

Mr Ajmal Batty, the Chief Executive of Tokio Marine Middle East, said: "We have perhaps lost sight of the track we have been on. In the UAE we are supposed to be the leader in everything-but when it comes to takaful, we have failed to differentiate ourselves."

Low profit margins, lack of scale and a failure to differentiate Islamic insurance products from their conventional rivals, have meant that takaful companies have not taken advantage of the massive growth of Shariah-compliant financial assets since the start of the decade.

The two-day World Takaful Conference which had for its theme, "R.evitalising the Industry: A New Way Forward for Takaful", ended yesterday.

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