Market Overview

Best's Briefing: Takaful Trends: Breaking the Reliance on the Qard' Hasan


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 report, 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.

Salman Siddiqui, associate director, said: "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."

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.

Yvette Essen, director of research, said: "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."

To access a complimentary copy of this briefing, please visit

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