Solvency determinants: evidence from the Takaful insurance industry

This paper contributes to the nascent literature on Takaful by investigating the solvency determinants for Takaful firms in both the Gulf Cooperation Council (GCC) and Malaysian economies. Our main objective is to develop a deeper understanding of the solvency determinants of these firms. Using hand- collected microdata for the period 2011 to 2016 for 52 Takaful firms, we document that firm size and wakalah fees significantly decrease solvency. From a regulatory point of view, this finding underscores that the percentage of wakalah fees should be closely monitored. Moreover, we find that other explanatory variables, including return on assets and the risk retention and investment income ratios, are not significantly associated with solvency. Overall, our results remain robust to many different model specifications. Further analysis indicates significant differences between the GCC and Malaysian Takaful firms. This may be explained by the different stages of financial development in the two markets.