GCC’s Islamic insurers face profitability challenges in 2021

Dubai: GCC’s Islamic insurers (Takaful) are expected to face profitability pressures due to very high competition in the overcrowded insurance industry in the region according to rating agency Standard & Poor’s.

Despite a recent improvement in profitability in Saudi Arabia’s insurance sector, more than one-third of insurers continue to report losses.

“Pressure on solvency and certain regulatory incentives have led to a number of mergers in Saudi Arabia over the past year and we expect this trend to continue throughout 2021. A new insurance law with higher reserving requirements due to come into force over the next year, could also increase pressure on small and unprofitable Takaful players in Kuwait that will need to raise capital to meet these requirements,” said S&P Global Ratings credit analyst Emir Mujkic.

“Overall, while we expect growth in the sector, we think it’ll be unevenly spread, with larger conventional insurers taking more of the gains.”

Intensifying competition

Amid weaker economic conditions, gross written premium/contribution growth has been relatively modest in most GCC markets, partly from lower business activity and increased competition among Takaful and conventional insurers in recent years. This has particularly been the case in motor and medical lines, which together make up about 80 per cent of total premium income in Saudi

Arabia and more than 60 per cent in most other markets in the region. Slowing population growth across the GCC, ongoing pressure on rates, and a drop in new car sales by about 16 per cent in Saudi Arabia and 35 per cent in the United Arab Emirates (UAE) and in other markets in the region in 2020 led to reduced insured values.

“Based on current market conditions and first-quarter 2021 results, we expect this downward trend to continue throughout the year,” said Mujkic.

Saudi Arabia, which generates about 85 per cent of total gross written premiums of all Islamic insurers in the GCC, experienced declines in premium income in motor business by 2.9 per cent in 2020 and 6.8 per cent in first-quarter 2021, due to falling new car sales. Despite this, S&P anticipate that premiums in Saudi Arabia will increase by up to 5 per cent in 2021 absent any major lockdowns. This will likely be driven by higher premium volumes for medical business through an extension of existing and new covers and if public hospitals--which historically have not charged insurers for their services—start billing insurers and some existing covers are extended to a wider population.

Flat growth in UAE

Although the UAE, home to the second-largest Takaful market in the GCC, is experiencing a noticeable increase in consumer confidence due to higher oil prices, the rollout of vaccines against COVID-19, and changes in visa requirements to attract more talent, the rating agency anticipates that premium income in the market will be flat in 2021 from ongoing pressure on motor and other rates.

“A pickup in tourism and the start of Expo in Dubai in October 2021 could lead to additional business, but we believe some of the larger conventional insurers will benefit more than many of the smaller takaful players. We also expect that gross written premiums/contributions will overall be relatively flat or even slightly decline in the remaining GCC markets in 2021, due to weaker demand,” Mujkic.

Profit pressures

Both Takaful and conventional insurers in the region have benefited from either no or only modest exposure to COVID-19-related claims. This led to strong improvement in operating performance in2020, since most governments in the GCC cover pandemic-related medical claims. At the same time, movement restrictions led to fewer nonessential hospital visits and motor claims. Based on S&P’s calculations, Takaful insurers in the GCC recorded a significant improvement in net income of about 67 per cent in 2020 compared with 2019. This improvement was mainly driven by stronger underwriting results.

The resumption of nonessential medical treatment has caused claims to rise to more normal levels in the first part of 2021, and is expected to continue over the next year. Although underwriting results are likely to remain overall profitable in 2021, overall earnings are expected decline.

Asset price risk

S&P consider asset volatility from investment results and a potential increase in premium receivables as a key risk for the earnings in the sector in 2021. Financial markets recovered in the second half of 2020 after as sharp drop following the COVID-19 outbreak, meaning that most Takaful companies could largely reverse some of the unrealized investment losses of up to 20 per cent of shareholder equity for some entities that they accumulated earlier in the year.

A decline in interest rates has prompted some Takaful players to further increase their exposure to equities or other high-risk assets in search of higher yields. Although equity markets had a strong start in most GCC countries in the first part of 2021, a potential return of volatility in capital markets could negatively affect earnings and capital of insurers with significant exposure to market risk.

A slow collection of receivables could also become an increasing issue for some insurers, depending on their portfolio and client mix. Premium collections will remain slow for some insurers as businesses and governments delay their payments in an attempt manage cash flows.