Dubai: Following significant premium growth in the GCC’s Islamic insurance (takaful) sector in 2014 and 2015, the industry has battled a slowdown that started last year and which is expected to linger, according to ratings agency Standard & Poor’s.

The sector reported high premium growth rates in the GCC, mainly driven by the introduction of new mandatory insurance covers, as well as strong increases in premium rates in Saudi Arabia, as new covers and actuarial pricing guidelines were adopted.

After reporting of annual growth in gross premiums of up to 20 per cent in the GCC takaful sector, growth slowed significantly to less than 1 per cent in 2016. This was largely due to a slowdown in Saudi Arabia, which has the largest Islamic insurance market in the GCC.

“Now that more policies are adequately priced, overall premium growth has slowed,” said S&P Global Ratings’ credit analyst Emir Mujkic. “The slowdown in premium growth has also been influenced by lower economic activity across all GCC states, as governments are trying to reduce or delay their spending due to lower revenues from hydrocarbon sales,” said Mujkic.

Despite the slowdown, the pre-tax net income of the publicly-listed companies in the sector improved to about $683 million in 2016, from about $274 million in 2015, mainly as a result of rate increases in Saudi Arabia following the introduction of actuarial pricing.

Saudi Arabia, where all 34 listed takaful players operate, was by far the most profitable insurance market in the GCC. Insurers operating in Saudi Arabia generated a total pre-tax profit of $666 million in 2016, but the three most profitable companies booked about 64 per cent of the total net profits. By contrast 15 listed takaful companies in the other GCC states such as Bahrain, Kuwait, Oman, Qatar, and UAE generated a meagre combined profit of $18 million, which is an improvement on a combined net loss of about $5 million in 2015. Despite the visible recovery in profits, analysts view this as a weak result.

“Notwithstanding the material improvement in overall pre-tax net income, it is still too early to announce good news for the sector as a whole. This is because the profits are still unevenly distributed across the sector, and historic rapid growth, combined with accumulated net losses, continues to erode the capital strength and damage the credit profiles of a number of companies in the sector,” said Mujkic.

Competition from larger conventional players is also impacting the growth of takaful players in the GCC. This is particularly true of some takaful companies in the United Arab Emirates (UAE), which are often competing with larger and more diversified conventional (non-Islamic) peers in an overcrowded market.

The shorter track records and less diversified businesses of these UAE takaful companies put them at a disadvantage now that stricter regulations are being adopted in the country.

In 2016, the combined gross premiums of Islamic insurers in the GCC reached nearly $11 billion (based on data from publicly listed companies), representing about 45 per cent to 50 per cent of total global Islamic insurance premiums. Last year, around 87 per cent of the Islamic insurance premiums in the GCC were written in Saudi Arabia, followed by the takaful sector in the UAE, with about 8 per cent of premiums.

Analysts expect growth in gross premiums to slowly pick up from this year.

“We anticipate that overall premium growth in the Islamic insurance sector in the GCC will pick up again slightly in 2017, as economic conditions slowly improve and governments continue to privatise some of their services, which should benefit the insurance sector as a whole. However, we expect that overall premium growth in the conventional insurance sector in the GCC will grow faster, by about 10 per cent, and outperform premium growth in the Islamic insurance sector, as conventional insurers often benefit from more diversified income streams,” Mujkic said.

Analysts say that there are too many insurance companies in the GCC, and that many of these players lack the scale to operate successfully in overcrowded and highly competitive markets.

While there have been only a small number of merger announcements by takaful players in the GCC over the past year or so, analysts do not expect to see any transformative mergers in the near term.

In our view, only well-resourced insurers with the capital strength and time to build scale and develop an effective competitive advantage will continue to prosper.