A.M Best believes that an over-dependence on interest-free loans (Quard’ Hasan) by the Middle East and North America (MENA) re/takaful sector is driving up policyholder deficits and not providing enough incentive for operators to manage their companies effectively.
As competitive market conditions create significant underwriting losses, operators’ reliance on the Quard has increased.
Additional pressures are being applied by problems unique to the re/takaful model, including excessive management fees, stemming from unrealistic profit expectations of investors.
A.M. Best considers this continued reliance to be leading to an uneven distribution of profits, forcing the Quard to continue to rise to meet the deficit.
New regulations being introduced to reduce this reliance are considered marginally credit-positive; in Bahrain, the regulator requires operators to transfer assets to the policyholders’ fund as part of the Quard provision.
Additionally, the majority of United Arab Emirates (UAE) companies have historically written off any change in the Quard against shareholder profits every year, which ensures that shareholders do not benefit excessively from wakalah fees.
However, A.M. Best believes that maintaining greater control over the fees charged to the policyholder funds by shareholders could be the most feasible and practical solution in the long term.
Another alternative would be for operators to move toward a profit-sharing approach, which many Malaysian companies already adopt. This reduces the moral hazard which comes from tying wakalah fees to the top-line, and ensures a more appropriate balance of earnings.
A.M. Best puts forward a scenario in which the traditional takaful method is challenged and considers the Shari’a-compliant Saudi Cooperative model a viable alternative.
The Saudi approach forces the shareholder to absorb 100% of underwriting losses, whilst giving 10% of profits to the policyholder, with the remaining 90% allocated to the shareholder.
According to A.M. Best this forces the operator to focus on good risk selection and pricing, and it also completely eliminates the need for the wakalah fee.
