Regulatory changes in some GCC countries have pushed up insurance prices, particularly for motor and medical cover, improving the underwriting profitability of the region’s insurers, including takaful operators, said Moody’s Investors Service.
In its report titled “Insurance - Gulf Cooperation Council Countries: Islamic insurers’ stronger underwriting profitability is credit positive”, Moody’s noted that many of the region’s Shariah-compliant insurers have previously made underwriting losses despite double-digit premium growth.
“The GCC takaful insurance sector’s improved performance will help it halt capital erosion, attract investor interest, and refocus on its most lucrative markets,” said Mr Mohammed Ali Londe, Assistant Vice President - Analyst at Moody’s.
“Despite double-digit growth in prior years, GCC takaful insurers’ underwriting profitability has been weak to negative in recent years – combined ratios for the region have been close to or above the 100% break-even point,” he added.
The improved profitability of GCC takaful insurers reflects an increase in prices triggered by regulatory changes, such as the introduction of actuarial reserving in Saudi Arabia and the UAE, according to the report.
In Saudi Arabia, actuarial reserving and pricing contributed to a decline in the overall loss ratio to 77% in 2016 from 79% in 2015, and reducing further to 76% during the first nine months of 2017. In the UAE, takaful operators’ loss ratio fell to 63% for the same time period from 89% and 79% at the end of 2016 and 2015, respectively.
The improvement in profitability will likely attract fresh interest in the GCC takaful sector from both existing shareholders and new investors, said the ratings agency. This would allow takaful operators to replenish their capital as well as improve their financial flexibility, equipping them if necessary to participate in market consolidation.
Furthermore, improved profitability from medical and motor insurance will allow takaful operators to focus on these markets, cutting back on costly expansion into other product lines. Previously, the operators’ persistently weak underwriting performance put them under pressure to expand their product offering, incurring extra costs as a result. M