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Dec 2022

GCC: Takaful operators continue to suffer from intense competition

Source: Middle East Insurance Review | Sep 2022

The Gulf region’s ongoing economic recovery from the COVID-19 pandemic, spurred by higher hydrocarbon prices, government spending on infrastructure projects and increasing activity in the non-oil sector will support Islamic insurers’ growth prospects with expectations for gross written contributions to expand about 10% in 2022 and 5%-10% in 2023, said S&P in a recent ratings direct report.
However, high competition and a surge in motor and medical claims will continue to constrain earnings, particularly in Saudi Arabia, if insurers do not substantially adjust their premium rates.
The report added that weak profitability combined with new regulation and higher capital requirements will likely prompt further capital raising and consolidation, notably in Saudi Arabia and the UAE over the next year.
Last year, Qatar’s takaful sector remained the GCC’s most profitable, with players reporting a combined ratio of lower than 80%. Meanwhile, Saudi Arabia saw weak results, with about two-thirds of insurers recording underwriting losses, leading to an overall combined ratio of about 103% compared to 98% in 2020.
Ongoing pressure on earnings and capital has already resulted in some capital raising and consolidation in Saudi Arabia and the UAE in recent years and this trend is expected to continue in 2022 and 2023. Upcoming regulatory- and accounting-related changes will likely lead to rising operational costs, requiring insurers to upgrade their IT systems and other internal processes.
“Ongoing pressure on earnings and capital has already resulted in some capital raising and consolidation in the two largest markets – Saudi Arabia and the United Arab Emirates – in recent years and we expect this trend to continue in 2022 and 2023,” said S&P Global Ratings credit analyst Emir Mujkic.
There has been a strong start to 2022, with Islamic insurers in Saudi Arabia and the UAE recording premium growth of about 17% and 18% respectively in 1Q compared with the same period in 2021. However, growth is expected to be moderate over the year, due to ongoing pressure on rates. Therefore, the takaful industry is expected to expand by 10% in 2022 with Saudi Arabia remaining the main driver of growth.
Motor and medical claims reached or even exceeded pre-pandemic levels in most GCC countries in 2021. Together, claim costs have increased, as the current inflationary environment is resulting in price increases for spare parts and services and amplified pressure on profit margins.
Overall, takaful industry’s net earnings are expected to remain modest in 2022-2023, mainly due to relatively weak profitability in Saudi Arabia. The Saudi market recorded a net loss of $13m in 2021 compared to a net profit of $370m in 2020. In contrast, combined net earnings in the other GCC markets (excluding Saudi Arabia) declined about 9% to $111m in 2021 from $119m in 2020. M 
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