GCC insurance markets ‘will grow’ but some pressures seen: S&P Global report

The Gulf Cooperation Council’s insurance sector will remain strong and “broadly stable” in 2018, despite ongoing regulatory and competitive challenges, but the industry is not without its pressure points, an  S&P Global Ratings report has said.

New regulations, which bring with them higher capital requirements, and other demands “will add to costs and increase pressure on profitability for some insurers”, the report, published earlier this month, notes, with the result that “some insurers will have to adapt their business models, and others, particularly in the United Arab Emirates, will need to raise additional funds or look for alternative ways to comply with the new regulations”.

“As insurers try to improve economies of scale, we may see some increased pressure on the industry to consolidate in 2018,” according to an introduction to the report.

Entitled Gulf Insurers: The Gap Between Big And Small Insurers Could Widen in 2018, the nine-page report notes that gross premium growth “will continue to highly depend on government-driven policies” in the various GCC countries, and will “likely be slower in some markets in 2018”.

“Although longer-term growth prospects remain satisfactory, they will continue to depend heavily on economic growth and regulatory-driven initiatives, such as the implementation of new compulsory insurance covers,” it says.

“There might be more volatility of profitability in 2018, as increasing operating costs and fierce competition in the GCC insurance sector will continue to put pressure on less-profitable companies.

“Since investment returns typically contribute to a significant share of earnings, geopolitical risks and fluctuations in global equity and commodity prices could lead to greater volatility in investment returns in 2018.

“We consider that these factors may therefore increase the gap between the large insurers, which are often more diversified and profitable, and their smaller counterparts.

“We believe that greater size helps insurers to mitigate high fixed costs and increase their competitiveness, which is why we anticipate greater pressure on insurers to consolidate in coming years.”

The report’s primary credit analyst is Emir Mujkic, pictured left, who is based in Dubai.

‘Mind the gap’

With respect to the likely widening of the gap between large and small insurers in 2018, referred to in its title, the S&P Global report’s authors say that they “expect the larger and more diversified [Gulf] insurers will continue to enjoy a competitive advantage” – currently the top five largest insurers typically control more than 50% of premium and profit income – and that this will lead “to material profitability imbalances between them and smaller companies, as well as those that do not have access to profitable commercial risks, which are highly re-insured in the international market”.

It adds: “Following strong rate increases for motor and medical covers over the past two years, leading to year-on-year net income growth of nearly 200% in Saudi Arabia in 2016 and around 50% in the UAE in 2017, we expect that overall underwriting profitability in both markets will be more moderate in 2018.

“One reason for our assumption is that the insurance regulator in the UAE has set new minimum motor insurance rates for 2018, which are about 20% to 25% lower than those in 2017, and will consequently lead to lower profitability.

“Another likely squeeze on profit margins will come from the introduction of VAT in both [the Saudi Arabian and UAE] markets in January 2018, the impact of which will depend on each insurers’ product mix.

“We expect that insurers may be able to recover VAT for policies written in 2017 and that run into 2018 from commercial, but not from all retail, policyholders.

“Although the VAT rate is set at only 5% at the moment and the amount per policy may be relatively low, we believe that this will still have an impact on already-tight profit margins, due to the large volume of policies affected.

“The markets in Oman, Kuwait, and Qatar will remain profitable, in our view, but are subject to mounting competitive pressure, in the absence of risk-based regulations and strictly applied actuarial pricing that could improve underwriting discipline.

“Medical insurance in Oman has been unprofitable at the technical level in the past two years, as the combined (loss and expense) ratio was above 100%.

“The newly introduced medical cover for expatriates could further impinge on overall profitability in the sector, if not priced appropriately.

“Insurers in Qatar are also likely to continue to be exposed to some earnings volatility due to high competition in the market and volatile investment results following the embargo on Qatar by some of its neighbors.”

To read and download the S&P Global report in its entirety, as well as to read about other similar recent reports – including an analysis of how the UAE’s listed insurers’ 2017 results looked, and an assessment as to how the new VAT could affect UAE insurers in 2018 – click here. 

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