Expectations are that takaful providers in the GCC countries will report a decline in their combined net income for the fiscal year ended December 2022 compared with 2021, said Moody’s Investor Service in a recent report.
The anticipated deterioration reflects rising claims and costs, only partly offset by higher prices. Moody’s expects GCC takaful operators, which currently lack scale, to accelerate their technology investment and seek out M&A deals to build the critical mass needed to improve efficiency and comply with more demanding regulation.
The sector’s growth prospects are favourable, reflecting the GCC region’s buoyant economy.
Tailwinds — strong economy underpins premium growth
The GCC region’s post-pandemic economic rebound, fuelled by rising oil prices and government investment in economic diversification, will drive faster premium growth.
Rising prices were a supportive factor in the second half of 2022, particularly in retail lines, where there was steep discounting during the pandemic. However, Moody’s expects intense competition to constrain future price increases. Increased demand for health and life insurance, the spread of compulsory insurance coverage and still low insurance penetration indicate ample scope for future growth.
Headwinds — claims normalisation and inflation weigh on profitability
In 2022, inflationary claims increases and a return to normal claims volumes after a pandemic-related decline put GCC insurers’ profitability under pressure. Other headwinds include the adverse impact of volatile financial markets on investment performance, amplified by insurers’ high exposure to equities and real estate.
Tighter regulations around governance, risk and capital management have added to compliance risks and costs, particularly for smaller insurers. Moody’s expects many small takaful players to seek M&A opportunities to help them meet capital and other regulatory requirements, and to spread the cost of their digitalisation investments. M