A Review of the Development of GCC Takaful Rating Fundamentals and Catalysts for Growth Over the Next Decade
10th Anniversary The World Takaful Conference 2015
Mahesh MistryDirector - Analytics
13 April 2015A.M. Best Europe – Rating Services Ltd
Disclaimer
13 April 2015World Takaful Conference 2015 2
© AM Best Company (AMB) and/or its licensors and affiliates. All rights reserved. ALL INFORMATION CONTAINEDHEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OROTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED,REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR INPART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT AMB’s PRIORWRITTEN CONSENT. All information contained herein is obtained by AMB from sources believed by it to be accurate andreliable. Because of the possibility of human or mechanical error as well as other factors, however, all informationcontained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall AMB have any liability toany person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error(negligent or otherwise) or other circumstance or contingency within or outside the control of AMB or any of its directors,officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation,communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential,compensatory or incidental damages whatsoever (including without limitation, lost profits), even if AMB is advised inadvance of the possibility of such damages, resulting from the use of or inability to use, any such information. The creditratings, financial reporting analysis, projections, and other observations, if any, constituting part of the informationcontained herein are, and must be construed solely as, statements of opinion and not statements of fact orrecommendations to purchase, sell or hold any securities, insurance policies, contracts or any other financial obligations,nor does it address the suitability of any particular financial obligation for a specific purpose or purchaser. Credit risk is therisk that an entity may not meet its contractual, financial obligations as they come due. Credit ratings do not address anyother risk, including but not limited to, liquidity risk, market value risk or price volatility of rated securities. NO WARRANTY,EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESSFOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN ORMADE BY AMB IN ANY FORM OR MANNER WHATSOEVER. Each credit rating or other opinion must be weighed solelyas one factor in any investment or purchasing decision made by or on behalf of any user of the information containedherein, and each such user must accordingly make its own study and evaluation of each security or other financialobligation and of each issuer and guarantor of, and each provider of credit support for, each security or other financialobligation that it may consider purchasing, holding or selling.
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Why Do Insurance Companies Fail?
Deficient loss reserves (inadequate
pricing), 42%
Rapid growth, 13%
Alleged fraud, 8%
Investment problems (overstated assets),
7%
Miscellaneous 8%
Significant change in business, 4%
Reinsurance failure, 3%
Catastrophe losses, 7%
Affiliate problems,
8%
Source: Property/Casualty Financially Impaired Companies – Primary Causes (1969-2011)Source: 1969-2011 U.S. P/C Impairment Review, June 25, 2012
World Takaful Conference 2015 13 April 2015
Key Rating Components
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Balance SheetStrength
Operating Performance
Business Profile
Enterprise Risk Management
+ Country Risk
Rating
Insurance Company Financial Strength
13 April 2015
Takaful Developments
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Main developments
• Takaful contributions have significantly grown over the past decade, albeit from a low premium base
• Enhanced and developing regulatory frameworks
• Takaful has not reached the highs of Shari’a compliant banking
• Contrast in market dynamics between Asian and Middle Eastern markets
• Influx of Takaful market entrants in recent years
• Some operators are generating surpluses and distributing profits
• Mutuality: aligning s/h and p/h interests
Overview of Selected Markets
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Select Middle East Countries - Key Facts (2013)
CountryPopulation (millions)
Gross Domestic Product (USD
billions)
Total Gross Written Premiums
(USD millions)Insurance
Penetration
No of Takaful / Retakaful
Companies (2014)
Gross Written Contributions (USD millions)
Takaful Penetration of Insurance
Market
Bahrain 1.2 33 688 2.1% 6 101 15%
Kuwait 2.9 195 952 0.5% 11 132 14%
Oman 2.9 83 947 1.1% 1 47 5%
Qatar 2.1 211 1471 0.7% 5 194 13%United Arab Emirates 9.1 396 7959 2.0% 13 649 8%
Jordan 6.6 34 686 2.0% 2 62 9%
Egypt 82.1 272 1851 0.7% 8 63 3%
Sources: Swiss Re sigma No. 3/2014; MENA Insurance Directory 2015, A.M. Best research
Business Profile
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Developing a market profile is a key challenge
Takaful Considerations
• Competing in the same space as conventional insurers
• New Takaful entrants finding it difficult to establish themselves
• Fragmented markets with intense pricing pressure due to competition
• Limited franchise and market position
• Uncertainty of competitive advantage over conventional companies
• Limited product differentiation
• Lack of skilled professionals
Operating Performance
813 April 2015World Takaful Conference 2015
Important to adopt a suitable model so that surpluses are created within the Takaful fund, with an appropriate fee structure
Takaful Considerations
• Understand the performance and balance of earnings between the s/h and p/h funds
• Ability to generate surpluses in p/h fund (competition, pricing pressure, high Wakala fees)
• Dependence on Qard’ Hasan
• Investment profiles can be concentrated and lack diversification
• Lower investment yield due to restrictive investment policy
• Over-dependence on investment income
Underwriting Ratios
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0%
20%
40%
60%
80%
100%
120%
2010 2011 2012 2013
Source AM Best ResearchBased on a sample of 14 GCC primary Takaful companies, 24 UAE conventional companiesWakala fees have been substituted for actual management expenses to derive ‘true’ expense ratios for the insurance portfolios
Takaful expense ratio
Takaful loss ratio
UAE expense ratio
UAE loss ratio
Underwriting Ratios of Takaful Operators Compared to the UAE Market
• Market combined ratios have steadily increased
• Conventional insurers produced stronger combined ratios
• Loss ratios are comparable (sometimes stronger) for Takaful operators
• High expense ratio is the key area of concern
Control over expenses is important to achieve improved underwriting performance
Wakala Fees
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60
70
80
90
100
110
120
130
140
150
160
2010 2011 2012 2013
USD
millions
Source: AM Best research.Based on a sample of 18 GCC re/takaful companies
Wakala feeExpenses bourne by shareholders fund
Wakala Fees Compared to Actual Expenses
• Wakala fees should reflect expenses, plus the cost of capital
• Wakala fees can distort the actual underlying underwriting performance
• Growing divergence between Wakala fees and actual expense –excessive fees charged to policyholder funds
• High wakala fees create greater pressure on performance and higher dependence on Qard’ Hasan
Balance of Earnings
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‐100
‐50
0
50
100
150
200
250
2010 2011 2012 2013
USD
millionss
Source: AM Best research.Based on a sample of 18 GCC re/takaful companies
Policyholder profit
Shareholder profit
Policyholder accumulated deficit
Balance of Earnings Between s/h and p/h
• S/h funds are generating profit, whereas p/h’ funds are in deficit
• Accumulated deficit of p/h funds continues to rise
• Increasing dependence on Qard’ Hasan
Suitable model and appropriate fee structure are critical to the sustainability of the model
Investment Risk
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Investment profiles are similar to conventional companies and can create volatility in overall earnings
43% 44% 41% 47% 41%
18% 20%19%
17%20%
14%15% 22%
22% 23%10%
8% 6% 5% 5%15% 13% 12% 9% 11%
2009 2010 2011 2012 2013
Top Five Largest Takaful Companies- Asset Mix (2009-2013)Cash Equitiy Real Estate Bonds Other-including intercompany
Sukuk Opportunities
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0
5
10
15
20
25
30
‐
5
10
15
20
25
30
Bahrain Kuwait Oman Qatar United ArabEmirates
Jordan Egypt Saudi Arabia
Num
ber o
f iss
uers
USD
bill
ions
Total Outstanding (as at Jan 2015) by Country
Total outstanding (USD bn) Number of issuers
• Uncharacteristically low appetite for sukuk investments (compared to bonds in mature markets)
• Small amount of sukuk issuances, which are limited to a few financial institutions
• Investment policies generally restricted to home country
Balance Sheet Strength
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Takaful Considerations
• Strength of regulatory framework is a key component- Commitment from s/h fund to p/h fund- Permanence of Qard’ Hasan- Uniformity of regulation
• Strength of Takaful fund can be limited due to:− Low surplus accumulation; − High wakala fees charged to Takaful fund− Over dependence on Qard’ Hasan to cover deficit
• Insufficient Retakaful capacity
• Unleveraged balance sheets
• Adequacy of loss reserves
“Enterprise” Risk Management
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A few questions…• What are the main risks or threats to a company?• How does a company control and mitigate risks effectively?• How embedded is ERM throughout the organisation?• How has ERM assisted in decision making?• What role does ERM play when considering capital adequacy?
Risk Management capability should be viewed relative to a company’s risk profile
A few observations…• Given the added complexity of Takaful companies; ERM plays an important role
within companies; particularly to gain a competitive advantage over peers• Corporate governance is important, particularly for start-up Takaful companies, given
the higher level of execution risks• Companies tend to manage risk on a silo basis. Further integration is required to
reach ‘enterprise-wide’ risk management
Risk management is only valuable if it is conducted by company management to protect and strengthen the key fundamentals of the company, and not meet requirements of outside parties
13 April 2015World Takaful Conference 2015
Catalysts for Future Growth
1617 February 2015The International Takaful Summit 2015
Final Remarks
• High growth markets
- Introduction of compulsory covers- Product differentiation
• Demonstrate the ‘value added benefit’ of the Takaful model:
- Emphasise mutuality: alignment of interests between s/h and p/h
- Appropriate balance of earnings between s/h and p/h
- Wakala fees closely reflect actual expenses
- Lower dependence on Qard’ Hasan- Evidence of surplus distribution
• Developments of Shari’a compliant investment markets
- Greater investment opportunities - Reduced concentration risk
• Regulation
- Uniformity across markets- Improved transparency- Actively police the market
• Demonstrating the financial health of Takaful operators
A.M. Best MENA Ratings
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Country Company Name
Issuer Credit Rating
Outlook / Implication Country Company Name
Issuer Credit Rating
Outlook / Implication
Algeria Compagnie Centrale de Reassurance bbb‐ Stable Qatar Qatar General a‐ StableBahrain ACR Re Takaful MEA B.S.C. (c) a‐ Stable Qatar Insurance Company (Q.S.C.) a Stable
Arab Insurance Group (B.S.C) bbb+ Stable QIC International LLC a Stable Bahrain Kuwait Insurance Company a‐ Stable Q‐Re LLC a Stable Life Insurance Corporation (International) bbb+ Stable Qatar Islamic Insurance Company Q.S.C. bbb+ StableBahrain National Insurance bbb+ Stable Doha Insurance Company Q.S.C. a‐ StableTrust International a‐ Stable Saudi Arabia Saudi United Cooperative Insurance Co bbb StableMedgulf Bahrain a‐ Stable Medgulf Saudi Arabia a‐ StableSolidarity General Takaful bbb Stable Tunisia Societe Tunisienne de Reassurance bbb‐ Stable
Egypt Arab Misr Insurance Group bbb Negative Turkey Milli Reasurans Turk Anomin Sirketi bbb‐ NegativeJordan Arab Orient Insurance Company bbb+ Stable UAE Abu Dhabi National Insurance (PSC) a‐ Stable
First Insurance Company bbb Stable Abu Dhabi National Takaful bbb+ StableARABIA Insurance Company ‐ Jordan bbb‐ Stable Al Sagr National Insurance Company bbb StableJordan Insurance Company Plc bbb+ Stable Alliance Insurance (PSC) a‐ StableMiddle East Insurance Company Plc bbb Stable Orient Insurance Company (PSC) a Stable
Kuwait Gulf Insurance Group a‐ Positive Dubai Insurance Company bbb+ StableGulf Life Insurance Company a‐ Positive Emirates Insurance Company P.S.C. a‐ StableKuwait Reinsurance Company KSC a‐ Stable Gulf Reinsurance Limited a‐ UR/Neg
Lebanon Al Ittihad Al Watani bb Negative National General Insurance Company a‐ StableArab Reinsurance Company S.A.L. bbb‐ Stable National Takaful Company (Watania) bbb‐ StableARABIA Insurance Company bbb+ Stable Oman Insurance Company (PSC) a StableMedgulf Lebanon bbb+ Stable Emirates Retakaful bbb+ Stable
Morocco Societe Centrale de Reassurance bbb Stable International General Insurance (Holding) bbb‐ StableOman National Life & General Insurance bbb Stable Union Insurance Company P.S.C. bbb Positive
Muscat Insurance Company SAOC bbb‐ StableMuscat Life Assurance Company SAOC bbb‐ Stable Takaful Companies in Green
1813 April 2015World Takaful Conference 2015
Questions?
A Review of the Development of GCC Takaful Rating Fundamentals and Catalysts for Growth Over the Next Decade
10th Anniversary The World Takaful Conference 2015
Mahesh MistryDirector - Analytics
13 April 2015A.M. Best Europe – Rating Services Ltd
