Although fast growing, most takaful insurers are still relatively small compared with their conventional peers, which have successfully diversified beyond low-margin retail lines.
The shorter track records and less-diverse books of business of takaful insurers puts them at a disadvantage now that the falling oil price and stricter regulations are hitting GCC insurance markets, the agency reported.
For a number of companies operating in the overcrowded takaful and Islamic cooperative insurance markets, S&P found that precipitous growth combined with net losses is eroding their capital strength and damaging their credit profiles.
Islamic versus conventional
Islamic insurers achieved aggregate premium growth of about 20%, year-on-year, in 2014 and 2015, compared with 10% for conventional insurers.
In 2015, the combined gross premium income of listed Islamic insurers in the region exceeded $10bn (£7.5bn, €8.9bn), compared to roughly $9bn of premium income generated by conventional insurers in the GCC.
However, profits were concentrated in only a few companies, with many Islamic insurers reporting losses.
Also known as cooperative insurance in Saudi Arabia, takaful is where members pool money in the form of ‘contributions’ to guarantee each other against loss or damage. Based on sharia law, participants enter into a contract to mutually help other participants should they suffer misfortune.
At the end of each financial year, after deduction of expenses, any remaining cash surplus is not retained by the company or its shareholders, but is returned to the policyholders in the form of cash dividends or distributions.
As a result, the policyholders, rather than shareholders, are the sole beneficiaries of the profits generated from the takaful and investment assets.
More than 85% of the region's Islamic insurance premiums were written in Saudi Arabia, which has the largest sharia-compliant market in the region.
There are half a dozen explicitly takaful insurers and 28 Islamic cooperative companies operating in Saudi Arabia.