UAE insurers to post modest decline in earnings this year

Dubai - Ratings on GCC insurers to remain broadly stable in 2021, mainly thanks to robust capital buffers

Amid weaker economic conditions, net earnings of insurers in the UAE in 2021 would record a modest decline as claims return to normal and investment returns remain subdued, S&P Global Ratings said.

Gross written premium (GWP) growth in the UAE has been relatively flat in 2020 and will likely remain so in 2021, albeit the domestic insurance market remains the largest and one of the most profitable in the GCC, S&P said in a report. It estimated an overall GWP decline of almost two per cent in 2020, particularly due to lower premium income from motor and life/savings businesses.

“While there could be some rate increases for motor policies in the second part of the year and for certain reinsurance lines, GWP growth will likely remain relatively flat in 2021, due to economic uncertainty and a decline in the expat population in Dubai and other emirates in 2020-21,” said Emir Mujkic, an analyst at S&P.

However, in 2020, insurers’ operating performance strengthened, thanks to fewer motor and medical claims. “Overall, we anticipate the combined [loss and expense] ratio weakening to about 92 per cent in 2021 from about 90 per cent in 2020. Regulatory oversight will likely strengthen, thanks to the merger of the insurance authority and central bank, which could lead to stricter enforcement of regulations, increasing pressure on smaller and weaker insurers,” Mujkic said.

In the GCC, ratings on insurers will remain broadly stable in 2021, mainly thanks to robust capital buffers and despite ongoing economic uncertainty relating to the Covid-19 pandemic. Real GDP in the GCC countries will likely recover to about two per cent in 2021 on average, after the sharp contraction in 2020, but the ratings agency said key sectors, particularly real estate, hospitality and retail, will remain under pressure this year.

“Ongoing high competition, a contraction in population of about four per cent across the GCC on average, and economic uncertainty will weigh on growth prospects and earnings, while elevated asset risk could lead to further volatility in the coming quarters,” Mujkic said.

S&P noted that with the relatively large number of insurers in the region, some of which are small or posting losses, it expects to see further capital raising and consolidation, particularly in Kuwait and Saudi Arabia where regulators may introduce higher capital requirements. “About 84 per cent of insurers in the GCC maintain capital adequacy above the AAA confidence level in our capital model, compared with about 59 per cent across all of Emea. However, the overall size of most insurers’ capital is relatively small and can therefore quickly fluctuate,” the ratings agency noted. Strong growth, single events, or accumulated losses have been the key reasons for a decline in capital buffers at some insurers in recent years, it said.

“We expect premium collections to remain slow as many businesses delay their payments in an attempt to survive. This will likely lead to an increase in receivables and write-offs, putting further stress on liquidity, asset quality and consequently credit conditions for insurers, in our view,” said the report.

“Despite fewer claims in 2020, due to movement restrictions and pandemic-related claims not being covered under most policies, an increase in competition and resumption of nonessential medical treatment could cause claims to rise to more normal levels and, consequently, lead to,” it said.

— issacjohn@khaleejtimes.com