As competitive market conditions create significant underwriting losses in the (re)takaful sector, many operators based in the Middle East and North Africa (MENA) region have become dependent on the Qard’ Hasan, according to a new briefing by A.M. Best.
However, the Best’s Briefing, titled, Takaful Trends: Breaking the Reliance on the Qard’ Hasan, states the continued dependence on this interest-free loan, which is provided by the shareholders to cover any deficit in the policyholders’ fund, does not provide enough incentive to operators to manage their companies in the best interest of policyholders and shareholders. A.M. Best considers it can to lead to an uneven distribution of profits and increasing policyholder deficits. The overreliance on the Qard to fund continued policyholder deficits has led to the so-called Perpetual Qard Syndrome.
“The need for the Qard can arise from a variety of market conditions, most of which conventional (re)insurers also encounter. These include deficits in the policyholders’ fund and non-payment of contributions, i.e., bad debt, as well as poor risk selection, inadequate pricing and weak investment management. In practice, however, deficits generally arise out of excessive management fees – a unique characteristic of the (re)takaful model—and poor underwriting discipline,” said Salman Siddiqui, Associate Director.
The briefing examines potential solutions to break the pattern of Qard reliance, which include obliging its write-off every three to five years, maintaining greater control over the fees charged to the policyholder funds by shareholders, operators moving toward a profit-sharing approach and the adoption of the Saudi Cooperative model.
“Driven by weak underwriting discipline and high Wakalah fees, policyholders’ funds continue to generate deficits, whilst shareholders’ funds enjoy reasonable profits. As a result, policyholders’ funds continue to accumulate higher deficits, with the Qard continuing to rise to meet these deficits. A.M. Best notes that not all operators exhibit these trends, with some annually generating surpluses and distributing them back to policyholders. However, this tends to be the exception rather than the rule in the MENA region,” said Yvette Essen, Director of Research.