GCC Islamic insurance companies to face headwinds: S&P Global
02 Aug 2017 - 23:55
Islamic insurers in the GCC will continue to face headwinds, despite better overall profits. The projected slowdown follows years of annual growth in gross premiums of up to 20 percent, which was mainly driven by the introduction of new mandatory covers, as well as strong increases in premium rates in Saudi Arabia, as new covers and actuarial pricing guidelines were adopted, S&P Global Ratings noted yesterday.
“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,” Mujkic added.
However, despite the slowdown, the pre-tax net income of the publicly listed companies in the sector improved materially to about $683m in 2016, from about $274m in 2015, mainly as a result of rate increases in Saudi Arabia following the introduction of actuarial pricing.
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.
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 $11bn, representing about 45 percent-50 percent of total global Islamic insurance premiums.
Last year, around 87 percent of the Islamic insurance premiums in the GCC were written in Saudi Arabia, followed by the takaful sector in the UAE, with about 8 percent of premiums. S&P Global anticipates 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 privatize some of their services, which should benefit the insurance sector as a whole.
However, the ratings agency expects that overall premium growth in the conventional insurance sector in the GCC will grow faster, by about 10 percent, and outperform premium growth in the Islamic insurance sector, as conventional insurers often benefit from more diversified income streams.