The retakaful market remains small and extremely challenging with companies struggling to compete with conventional reinsurers, putting the sustainability of the retakaful model in doubt, according to international ratings agency, A.M. Best.
Retakaful is the Islamic alternative to reinsurance, and owing to greater interest for Islamic insurance (takaful), A.M. Best highlights that many investors view the retakaful sector as a growth opportunity.
However, in recent times a number of retakaful firms have either exited the marketplace or are really struggling for profitability, raising some doubts about the sustainability and attractiveness of the retakaful space.
Over the last two decades there’s been an influx in the establishment of retakaful companies, particularly in the Middle East and Asia Pacific, some being standalone entities and others being subsidiaries of global reinsurance companies looking to take advantage of an additional, and diversifying revenue stream.
But according to an A.M. Best Special Report, success in the industry has been limited, and a number of companies have exited the market in recent times.
Retakaful companies struggle to compete with more established conventional reinsurers during a soft market environment, with many companies that operate in the Middle East, Asia Pacific and Africa recording substantial underwriting losses.
“The sustainability of the retakaful model is likely to be tested over the coming years and it remains debatable whether it can be seen as a viable alternative to conventional reinsurance over the long term,” said A.M. Best.
The ratings agency explains that the success of the retakaful model is “intrinsically linked to that of the primary takaful market,” which, as a segment, has generally found the operating landscape challenging.
“In A.M. Best’s opinion, this is important for the retakaful market, as operators primarily engage in non-life retakaful solutions, with family takaful largely retained by the primary operators,” said A.M. Best.
At the same time, the credit ratings of takaful players are generally weaker than conventional insurers, which results in restricted access to higher quality business, which in turn means that retakaful players are more likely to have greater access to retail lines of business, “directly reflecting the profile of the primary takaful market.”
“The success of retakaful operators hinges on their ability to access good quality business. However, reflective of the takaful experience, the retakaful sector has failed to sufficiently differentiate itself from conventional peers. Retakaful operators therefore remain in direct competition with local and international reinsurers.
“Moreover, the ability of retakaful operators to attract quality risks is further limited by their narrow scope, providing Shari’a compliant solutions predominantly in the Middle East, Asia and Africa,” said A.M. Best.
The ratings agency explained that unless regulation and Shari’a boards make the use of retakaful mandatory, as is the case in Pakistan, the current business model might be under threat over the long-term.
Retakaful branches and subsidiaries of large conventional reinsurers are having some success in the market, and alongside growing interest in Africa, leads A.M. Best to believe there is a future for the niche sector in the global insurance and reinsurance industry, although there appears to be a number of challenges the segment needs to address.