Why conventional insurance will outpace takaful in the GCC

The GCC's insurance sector needs to undergo consolidation in overcrowded markets.

Overall premium growth in conventional insurance will fare better than the Islamic insurance segment, or takaful, this year, according to S&P's latest sector report on the Gulf.
The key factors that will help improve the sector's performance will general improvement in economic condition in the region and also the more diversification of conventional players.
"Overall premium growth in the Islamic insurance sector in the GCC will pick up again slightly in 2017, as economic conditions slowly improve and governments continue to privatise some of their services, which should benefit the insurance sector as a whole. However, we expect that overall premium growth in the conventional insurance sector in the GCC will grow faster, by about 10 per cent, and outperform premium growth in the Islamic insurance sector, as conventional insurers often benefit from more diversified income streams," said Emir Mujkic, associate director for insurance ratings at S&P Global Ratings.
However, S&P said now that more policies are adequately priced, overall premium growth has slowed. The slowdown in premium growth has also been influenced by lower economic activity across all GCC states, as governments are trying to reduce or delay their spending due to lower revenues from hydrocarbon sales.
Mujkic maintained that operating performance remains one of the key issues in the takaful sector in the UAE because companies often write less-profitable personal lines and their premium income is too small to dilute their fixed operating costs.
"New risk-based regulations pose a significant challenge to many smaller and less-diversified insurers with tight capital buffers in the UAE. Takaful companies comprise a fair portion of this segment and a number of takaful insurers will therefore be particularly affected by the new rules, which will need to be fully implemented by the end of 2018," he noted.
Generally, premium income from life, health and motor insurance has been growing at moderate rates over the past years; Mujkic expects this trend to continue mainly due to increase in population and introduction of new or extension of existing compulsory covers and inflation in claim costs. For example, S&P estimates that costs for medical services are going up by about 10 per cent year-on-year, which means that insurers need to adjust their premiums annually keep up with that trend.
Adil Abid, partner of financial services practice at KPMG in the Lower Gulf, forecasts health and motor continuing to show growth and profitability in quite a few companies - albeit the health sector will be a challenge in Dubai due to the intense competition among insurance companies to gain market penetration in the Emirate resulting in lower achieved margins.
Abid sees claims cost may increase in Abu Dhabi as private hospitals begin to take in patients as part of the Thiqa programme. "There is also uncertainty ahead for life assurance companies as they get to grips with the new proposed legislations being introduced by the insurance industry, especially those related to commissions. We thus anticipate some consolidation in this segment as companies re-think their long-term strategy to achieve profitable growth."
Abid maintains that considering the strong first half, it will be a challenge for companies to continue to sustain the same level of growth in the next six months, especially considering the key milestones for insurance authority regulations which will become effective on all insurance companies by year-end.
"These are primarily related to solvency margins, minimum guarantee funds and investments maintained at set thresholds across financial investments. This may lead to some companies being significantly challenged in terms of compliance. As a result, we expect to see more consolidation in the market as well as key decisions being taken by shareholders of insurance and takaful operators in terms of introducing additional capital within the Balance sheet of entities in order to meet these gaps and shortfalls.
The S&P analysts said the GCC's insurance sector needs to undergo consolidation in overcrowded markets, therefore, only well-resourced insurers will prosper in coming years.
"There are too many insurance companies in the GCC, and that many of these players lack the scale to operate successfully in overcrowded and highly competitive markets. While we have seen a small number of merger announcements by takaful players in the GCC over the past year or so, we do not expect to see any transformative mergers in the near term."
"In our view, only well-resourced insurers with the capital strength and time to build scale and develop an effective competitive advantage will continue to prosper," says S&P's report entitled "Islamic Insurers in the Gulf Cooperation Council Continue to Face Headwinds, Despite Better Overall Profits".
- waheedabbas@khaleejtimes.com