UAE insurance sector rebound to exceed 2019 levels

The UAE’s insurance sector, the largest and among the most profitable in the $26.5 billion GCC insurance market, is on track to exceed 2019 levels in terms of gross written premium thanks to higher economic activity.

Analysts at S&P Global forecast GCC insurers will remain profitable in 2022, but ongoing intense competition, particularly in motor lines, will likely constrain technical results.

“Overall, earnings in 2021 were supported by well-performing capital markets, resulting in stronger investment returns. Increased capital market volatility in 2022 could offset higher interest rates and mean lower returns,” said Emir Mujkic, director, Insurance Ratings, at a webinar.

“We project profitability will only improve in Saudi Arabia this year, where pressure on underwriting is likely to ease. However, we note that this comes from a low base and project the sector’s profitability will remain relatively weak,” said Mujkic.

According to research firm Statista.com, the insurance penetration rate in the GCC is expected to remain far below the global average of 7.4 percent until 2026. The insurance penetration rate is the gross written premium measured as a percentage of the gross domestic product. The market size of the GCC insurance industry is expected to increase from $26.5 billion in 2021, to $31.1 billion in 2026.

S&P analysts said improving economic sentiment and higher oil and gas prices (an average Brent oil price of $85 for the remainder of 2022) should lead to accelerated economic growth in the region.

“We expect that insurers will likely benefit from ongoing infrastructure spending, new mandatory coverage, and potentially higher insurance demand. That said, an uncontrolled resurgence of Covid-19 cases limiting mobility could slow the global and regional economic recovery,” said the panel of analysts, including Volker Kudzus, senior director and sector lead, Insurance Ratings, and Sachin Sahni, associate director, Insurance Ratings, and Trevor Cullinan, director, Sovereign Ratings.

While profitable earnings and robust capital buffers continue to support rated GCC insurers’ credit profiles, potentially more volatile capital markets and ongoing intense competition will increase pressure on earnings in 2022.

The region’s ongoing economic recovery from the Covid-19 pandemic, thanks to higher oil prices, government spending, and increasing activity in the non-oil sector, will also boost insurers’ growth prospects.

“Although new regulatory and accounting developments are enhancing risk awareness and policyholder protection, this is not without cost. We expect to see further capital raising and consolidation, particularly in Kuwait and Saudi Arabia where regulators have introduced new laws leading to higher capital requirements,” said the panelists.

In the UAE, weaker economic conditions led to a decline in gross written premium (GWP) in 2020, particularly due to lower premium income from motor and life/savings business.

“With GWP growth picking up again thanks to higher economic activity, we expect 2022 to exceed 2019 levels. More intense competition, resulting in lower motor rates, led to a deterioration in technical results in 2021. As a result, we estimate an increase in the market combined ratio (loss and expense) to about 91 per cent in 2021 from about 87 per cent in 2020. We anticipate the ratio will further weaken to about 92 per cent in 2022, as competition and rates pressure in certain lines remain high,” they said.

“Although rated UAE-based insurers are typically very well capitalized, with substantial excess capital above requirements, we note that at least 10 per cent of listed players operate below required minimum capital/solvency levels. We expect to see stricter enforcement of regulations, which will increase pressure on smaller and weaker insurers,” S&P Global analysts said.

— issacjohn@khaleejtimes.com