SYDNEY Feb 7 Inconsistent regulation across the
Gulf's takaful (Islamic insurance) industry is hurting profit
margins and credit ratings, while leaving the door open to
regulatory arbitrage, according to global insurance rating
agency A.M. Best.
New rules in Oman and updated ones in Bahrain are expected
this year, but lack of coordination among regulators is making
life difficult for takaful operators, said Vasilis Katsipis,
Dubai-based general manager for market development at the firm.
"Regulators have little interest in coordinating among
themselves, but there is growing recognition of the importance
of takaful. We are seeing regulators thinking about it," he told
In some cases companies are having to establish complex and
expensive safeguards, such as ring-fencing assets, to make up
for weaknesses in regulatory regimes, increasing their funding
costs by as much as 1 percentage point, Katsipis said.
Loose regulation can also affect ratings. "In lax regimes,
unless they put safeguards, the rating will be deep in the
unsecured level. Five to six notches could be the extreme."
The takaful sector, which has its core markets in the Gulf
and southeast Asia, is a bellwether of consumer appetite for
Islamic finance products. But slowing growth in core markets is
raising pressure on the sector to boost profits.
Global takaful contributions were expected to reach $12.4
billion in 2012 but profitability remained below that of
conventional insurers, according to a report by consultants
Ernst & Young last April.
Variation in rules has prompted some companies to take
advantage of the differences - booking business in one country
while selling policies elsewhere, Katsipis said.
"If you are a company that writes business in more than one
location, it's easy to set up in one and write business in
another branch. An arbitrage opportunity is still there and will
remain there as long as you have differences between
Jurisdictions with specific takaful rules include the United
Arab Emirates, Bahrain, the Dubai International Financial Centre
and the Qatar Financial Centre. Some others, such as Kuwait, do
not have specific regulations.
A report by A.M. Best said Kuwait lagged the Gulf in
developing regulation for takaful because its insurance rules
dated back to 1961, but a planned new insurance law was expected
to have a separate code for Islamic insurance.
In Saudi Arabia, insurance legislation is applicable to both
takaful and conventional insurers, but rules don't require
segregation of takaful funds from shareholder funds; some
Islamic scholars view such segregation as necessary to ensure
that operators invest in sharia-compliant ways.
The Saudi regulator has discouraged takaful operators from
using specialist terms in their accounts to ensure comparability
with conventional insurers, leaving Islamic contracts "hidden"
in the accounts, the report said.
Rules on the winding-up of takaful companies vary. UAE and
DIFC rules give priority to takaful beneficiaries, but there are
no equivalent provisions in the QFC, Bahrain or Saudi Arabia,
and in Kuwait the situation is unclear, the report said.
The regulatory environment is complicated by the relative
youth of the takaful industry, as there are few if any recent
examples of takaful firms being wound up. Other regulatory
safeguards, such as ring-fencing assets, have yet to be tested.
When firms manage multiple takaful funds, an issue can arise
over whether a surplus in one fund can be used to subsidise a
deficit in another. Such subsidisation can be seen as
inconsistent with the risk-sharing principles of takaful, but
with the exception of the QFC, this issue is not addressed
directly in the Gulf's takaful rules, the report said.
(Editing by Andrew Torchia)