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Profits of GCC's Islamic insurance (takaful) providers have come under pressure as claims rose after last year’s pandemic-induced lockdowns and premiums are held back by stiff competition. Image Credit: Shutterstock

Dubai: Profits of GCC's Islamic insurance (takaful) providers are under pressure as claims rose after last year’s pandemic-induced lockdowns. Data compiled by Moody’s show GCC takaful insurers’ aggregate net income for H1-2021 was 36.5 per cent lower than in the same period last year.

Although the sector posted a $260 million net income, the decline over H1-2020’s $411 million reflects a 12.4 per cent increase in incurred claims, as normal claims activity resumed after a sharp decline due to the lockdown.

- Mohammed Ali Londe, Vice President - Senior Analyst

Higher claims

The increase in claims pushed up the takaful sector’s loss ratio (claims as a percentage of premiums) to 78.7 per cent at the close of first-half of 2021 from 74.9 per cent by end 2020, and 70.3 per cent at H1-2020. Stiff competition in the industry has impacted insurance pricing which, analysts expect will further pressure the sector’s profitability.

“We expect competition to pose continued profitability challenges for the takaful sector," said Londe. "Other headwinds include the adverse impact of low interest rates and volatile financial markets on investment income.”

Premium lag
GCC takaful insurers’ small average size makes them prone to fierce price competition. This is a key reason why takaful premiums have grown by just 1.7% over the past five years, lagging behind the overall market growth rate of 2.8%.

Flat premium growth

The GCC takaful sector’s combined premium revenue rose by just 0.5 per cent in 2021 compared with the same period of 2020, being held back by intense price competition. This masks some stronger performances at national level, with premiums in Saudi Arabia expanding by 3.2 per cent. “We believe growth prospects in the GCC region remain favorable, reflecting a steady widening of mandatory medical cover and growing demand for health insurance post-pandemic,” said Londe.

GCC takaful
GCC takaful Image Credit: Moody's

Digitalisation and M&A

The GCC takaful industry stepped up its investment in digitalization in response to the pandemic, which encouraged consumers to buy insurance online. “We foresee that many small takaful players will seek M&A opportunities to spread the cost of this investment, and to meet increased capital and other regulatory requirements, particularly in Kuwait, Saudi Arabia and the UAE,” said Londe.

In Saudi Arabia, recent legislation gives the regulator the ability to raise the minimum capital for insurers to at least SR300 million from SR100 million currently, with the final regulatory implementation expected soon. Similarly, in March last, Kuwait’s insurance regulator published new executive directives that increase insurers’ minimum capital and introduce risk-based capital measures and actuarial-led reserving.