The net income of listed companies in the GCC Islamic insurance (takaful and Islamic cooperative tawuni) sector nearly halved in 2017 to $375m, from $674m in 2016, according to S&P.
The decline was mainly driven by weaker results in the insurance sector in Saudi Arabia and follows an increase in earnings by about 151% in 2016, indicating some considerable earnings volatility in the sector.
The Islamic insurance sector continues to face secular challenges around relatively concentrated and undifferentiated business models and high expense ratios that leave them susceptible to adverse event risk related to solvency, governance and accountancy, said the report. That said, it is likely that medium-term growth prospects in the sector remain satisfactory given relatively low penetration levels and Islamic insurance is expected to remain profitable overall in 2018, said the report. Strengthening capital levels are also observed.
The Saudi Arabian market, which contributes about 85% of total GWP, has been the main source of earnings volatility in recent years. While net income in 2016 grew significantly due to rate increases as a result of stricter application of actuarial pricing, 2017 results dropped materially.
The Islamic insurance industry in GCC countries ex-Saudi Arabia recorded an increase in net income by about 832% to $82m in 2017 from $9m in 2016, and an increase of more than 60% in the first quarter of 2018 compared with the same period last year.
This improvement was mainly driven by better results in the UAE, the second-largest Islamic insurance market in the GCC contributing about 8% of total GWP, with Salama generating a net profit of $10m in 2017 against a net loss of $48m in 2016. Year-on-year earnings of Islamic insurers in other GCC countries remained broadly flat in 2017.
While the GCC Islamic insurance sector is expected to remain profitable overall in 2018, there are a number of factors that may affect insurers’ profitability in Saudi Arabia and the UAE, and therefore the overall results.
First, underwriting profits are lower in Saudi Arabia and the UAE because insurers apply no-claims and other discounts to motor policies to gain or maintain market share. Second, insurers in Saudi Arabia have been providing additional coverage under medical policies, which may lead to weaker earnings if this business is not priced adequately. Third, the challenge of collecting VAT from retail clients for policies written in 2017 and into 2018, as well as new accounting standards leading to higher doubtful debt provisions, could see net earnings decline further this year.
Industry-wide, 1Q18 saw an overall decline in GWP by about 3% compared with 1Q17, driven by a 3.7% drop in GWP in Saudi Arabia during that period mainly because of pressure on rates as well as slower consumer spending following the introduction of VAT in January 2018.
The departure of a large number of expats from Saudi Arabia over the past year has also resulted in lower premium income. Local authorities’ efforts to tackle the large number of uninsured drivers, combined with the arrival of women drivers in mid-2018 and higher rates for medical business is expected to support premium growth in Saudi Arabia in the medium term.
Total shareholders’ equity in the Islamic insurance sector in the GCC improved by about 3% to $4.8bn in 2017 from $4.6bn in 2016, as a number of insurers retained parts of their profits or raised additional funds through rights issues. The rate of increase in shareholders’ equity exceeds premium growth, which indicates a slight improvement in overall capital adequacy.
However, despite this overall improvement in capital adequacy, there are too many insurance companies in the GCC and that many of these players lack the scale to operate successfully in overcrowded and highly competitive markets, the report said. It is likely that credit conditions in the sector may weaken over time if total premium growth remains slow and insurers try to capture market share by further lowering their rates. Local regulators, particularly in Saudi Arabia and the UAE, are expected to remain committed to maintaining market discipline by introducing more sophisticated risk-based regulations.
This may mean that there will be fewer but more profitable insurers in these markets over time, particularly if smaller and weaker-capitalised insurers are not able to cope with all the additional regulatory demands. M