(MENAFN - The Peninsula) 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 competition. 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 KD47.4m (167.7m) 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.