DOHA: The GCC insurance sector grew to nearly $16bn in terms of gross premium written in 2012. The sector witnessed growth rates of over 10 percent in the region’s largest insurance markets during the year.
Ample capital is available within the industry to back the growth in insurance premiums. Both regional and international investors are looking for a slice of the business because of the growth potential. This creates a highly competitive marketplace in which all companies are contending for profitable business, Standard & Poor’s noted yesterday.
In Standard & Poor’s Ratings Services’ view, a small number of well-established insurers are reaping the benefits of the fast-growing insurance markets in the Gulf Cooperation Council (GCC) region. Meanwhile, inflated valuations and a reluctance to relinquish control are preventing smaller insurers from consolidating. In trying to avoid reporting losses, we believe revenue-starved insurers could distort market pricing for all.
Insurance in the GCC region continues to benefit from generally robust economic growth because the considerable hydrocarbon wealth of the GCC states sustains their expanding economies. Real GDP growth in the region was nearly 6% in 2012, and we expect this growth momentum to continue in 2013 and beyond.
Although the ratings agency estimates that the GCC markets are profitable as a whole, the profits tend to be concentrated at larger and more-established entities. For instance, in Saudi Arabia, the three largest companies reported 80 percent of all profits in 2012; meanwhile, nearly a third of Saudi insurers reported losses. “We observed a similar trend in the United Arab Emirates (UAE) — again, the three largest companies reported over 80 percent of the market’s profits in 2012. Even if we exclude takaful companies, this figure is still over 50 percent. Results for UAE takaful companies were significantly skewed by losses at Salama/Islamic Arab Insurance Co. (P.S.C.).
Many UAE-based insurance companies established in the past few years are struggling to deliver sustainable levels of performance, despite acceptable reported loss ratios.
“ In our view, inadequate profitability is more pronounced at the lower end of the market because smaller companies lack economies of scale. Many of them lack the critical mass—sufficient business volumes—to cover their operating expenses”, S&P report noted.
Over time, a lack of profitability erodes capital, leaving some companies with little prospect of finding a profitable niche. It is just a matter of time before these companies start to run out of capital and face a risk of default. Therefore, for some companies, consolidation makes economic sense. If companies merge, it could improve their economies of scale and offer them cost efficiencies. Acquirers tend to be more successful entities, indicating that they are better-managed or that they have larger resources at their disposal. Consequently, an acquired entity may benefit from the resources, know-how, and technical expertise of its new management team.