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Oct 2021

GCC: Profitability momentum for takaful operators in doubt

Source: Middle East Insurance Review | Sep 2021

Islamic insurers’ strong profitability might not continue throughout 2021, according to an S&P Global Ratings report. Unlike in the corporate sector, where the pandemic led to widespread downgrades in 2020, its credit ratings on takaful providers and conventional insurers in the GCC have been stable over the past 18 months, supported by relatively strong capital buffers.
 
“We have taken several positive rating actions on takaful companies so far this year. Our outlook on the sector for the next 12 months remains stable. However, given that risks related to the pandemic persist, we could take rating actions in the event of a sharp decline in asset prices, unexpected and severe technical losses, or governance and internal control failures,” the report said.
 
S&P expects an economic recovery in the GCC in 2021, supported mainly by the increase in oil prices and the vaccine rollout. However, slow vaccination progress in some parts of the world and new variants could dampen the recovery. “An uneven recovery, ongoing cost-saving measures in many industries and a shift to less business travel has further increased the pressure in sectors such as real estate, retail, transportation and hospitality,” said S&P Global Ratings credit analyst Emir Mujkic in the report.
 
“We believe these factors, combined with very intense competition in the insurance sector, are weighing on growth prospects for gross written premiums/contributions of both takaful and conventional insurers,” said Mr Mujkic.
 
‘Very high competition in the overcrowded GCC insurance industry’ will continue to weigh on earnings in 2021. Despite a recent material improvement in profitability in Saudi Arabia’s insurance sector, more than one-third of insurers continue to report losses. A new insurance law with higher reserving requirements due to come into force over the next year could increase pressure on small and unprofitable takaful players in Kuwait. They will need to raise capital to meet these requirements.
 
“Overall, while we expect growth in the sector, we think it’ll be unevenly spread, with larger conventional insurers taking more of the gains than the takaful,” said Mr Mujkic. M 
 
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