KUWAIT Feb 11 Kuwait's first Islamic insurer
was born 14 years ago, but its takaful firms are still
struggling in a crowded market that faces cut-throat
This has led to stagnant growth and persistent losses for
takaful firms operating in Kuwait, one of the world's richest
countries on a per capita basis, raising doubts about the
sector's long-term viability.
In a market with 32 insurers, takaful firms say they are at
a disadvantage to their conventional peers which have operated
for decades, allowing them to build solid customer bases and
amass large financial surpluses.
While Islamic finance widens its global footprint, Kuwait's
takaful sector could shrink in the next five to seven years,
said Abdulrazaq M. Al Wohaib, managing director and chief
executive of T'azur Takaful Insurance Co.
"We are moving opposite to the rest of the world - this has
reduced the profit margins of these companies."
Gross takaful contributions in Kuwait grew an estimated 4.3
percent in 2012 after 4.5 percent in 2011, among the lowest
growth rates for takaful anywhere in the world, a report by
consultancy Ernst & Young estimated.
Kuwaiti takaful firms posted a combined 47.4 million dinars
($167.7 million) in premiums in 2012, an 18.7 percent share of
the total, Commerce Department data showed. This was spread
across 11 locally incorporated takaful firms; many companies in
the sector have failed to post consistent profits.
Unlike conventional insurance, takaful is based on the
concept of mutuality, where a takaful operator sets up a fund to
oversee and manage pools of money contributed by policy holders.
Takaful firms are obliged to distribute excess profits to
policy holders, unlike conventional firms which account for such
surpluses as profits.
But when deficits occur, these must be funded with
interest-free loans extended by the firm, which can lead to
losses for shareholders, said Hussain Ali Al Attal, chairman and
managing director of First Takaful Insurance Co.
Takaful companies argue this puts them at a disadvantage
amid intense competition from conventional firms; the country's
six largest insurers command close to two-thirds of the market.
Furthermore, the takaful sector lacks a dedicated
supervisory body, leaving an opening for negative competitive
practices, Al Attal added.
Price under-cutting by conventional firms aims to drive
takaful firms from the market, said Saad Ebrahim Makki, vice
chairman and chief executive of Takaful International Co, a unit
of Bahrain's Takaful International.
"It should be competition with you in terms of quality of
service and not competing with you in the price, because in the
end you and I sell the same service."
Conventional insurers dispute claims of a price war and
instead point to the way takaful companies are run.
"The business model of takaful is not wrong, but the error
is in the application. The error is the result of high operating
expenses that don't fit with the revenue," Ali Hamad Al Bahar,
general manager of Kuwait Insurance Co, the country's
oldest insurer, told Reuters.
"Profitability is based on reducing expenses and maximising
revenues. Companies that have not been able to achieve earnings
and dividends to shareholders did not benefit from this basic
rule of business."
While Kuwaiti insurers generally weathered the global
financial crisis, the downturn in 2008 hit takaful firms hardest
because of their relative youth and limited financial reserves,
Another criticism of the Kuwaiti takaful sector is that some
firms focus not on their core business of providing insurance
but on investment, since setting up an insurance company can
avoid strict control by the country's central bank, which
oversees banks and investment firms.
Many companies were founded with the aim of "capital
investment, no more, no less", said Makki.
An additional problem is that the sector has only limited
access to lucrative contracts from the oil sector, as
regulations require firms to be listed on the local bourse to
bid for such business, a requirement met by only two takaful
firms, said Al Wohaib.
Even when takaful firms can bid for such business, the size
of the risks may be too large for them, especially since they
lack the backing of a large retakaful industry to spread the
burden, he added.
Abdel Hamid El Baaly, head of the Islamic Law Department at
Kuwait International Law School, said that ultimately, many of
the takaful sector's problems were linked to the need for
clearer, more supportive regulation.
"We need a law to regulate and control the industry's
movements and develop these companies," he said.
Kuwait's current insurance law dates back to 1961. According
to global insurance rating agency A.M. Best, Kuwaiti regulators
have drafted a new insurance law that would feature a separate
code for takaful, but the law has yet to be presented to
The slow pace with which parliament addresses economic
policy, partly because of longstanding political tensions
between parliament and the cabinet, means it is not clear when
the legislation might be passed.
In the meantime, looking abroad may be the only good option
for the Kuwaiti takaful firms which can afford it.
The lack of local business opportunites is pushing companies
such as First Takaful to explore the Saudi Arabian and Turkish
markets in order to diversify their sources of income and gain
further experience, said Al Attal.
(Writing by Bernardo Vizcaino; Editing by Andrew Torchia)