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 in 2022 and 2023, according to Standard &Poor's (S&P), a global credit rating agency.
"Improving economic sentiment, ongoing infrastructure spending, new mandatory coverage, and overall higher insurance demand will benefit the Gulf Co-operation Council's Islamic insurers over the next two years," S&P said in a report.
Higher hydrocarbon prices, with its assumption of average Brent price of $100 per barrel for the rest of 2022 and $85 in 2023, will lead to accelerated economic growth in the oil-exporting region, it said.
"This should feed through to the Islamic (takaful) insurance sector, where we expect gross written premiums/contributions to expand about 10% in 2022 and 5-10% in 2023," it said.
However, the picture in individual markets may not be so positive. Last year was profitable overall for the sector but earnings were not evenly distributed.
Notably, Qatar's relatively small takaful sector remained the Gulf region's most profitable with insurers reporting a combined (loss and expense) ratio of lower than 80% (a lower combined ratio indicates a higher underwriting profit).
Meanwhile, the largest market, Saudi Arabia, saw weak results, with about two-thirds of insurers recording underwriting losses, leading to an overall combined ratio of about 103% compared with 98% in 2020.
"We anticipate that intense competition and an increase in claims frequency will continue to weigh on Islamic insurers' earnings in 2022, before a modest recovery in 2023, thanks to anticipated rate adjustments in loss-making lines and higher interest rates, which should boost investment returns," S&P said.
Ongoing pressure on earnings and capital has already resulted in some capital raising and consolidation in the two largest markets - Saudi Arabia and the UAE - in recent years and "we expect this trend to continue in 2022 and 2023," it said.
The upcoming regulatory - and accounting - related changes (such as International Financial Reporting Standard 17) will likely lead to rising operational costs, requiring insurers to upgrade their information technology systems and other internal processes. This will also reinforce the need for capital raising and mergers, it said.
In 2020, regional takaful and conventional insurers benefited from little or no exposure to Covid-19-related claims and saw fewer motor and medical claims due to movement restrictions.
However, the rating agency notes that motor and medical claims reached or even exceeded pre-pandemic levels in most GCC countries in 2021, as economies opened up and mobility increased.
At the same time, 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.
"We also expect that investment returns will remain volatile in 2022," it said.
Although the GCC's equity markets have performed better than many globally and are still in positive territory for the year to date, it notes that bond/sukuk prices have declined following an increase in interest rates.
"We now expect the US interest rates to increase above 3.5% by mid-year 2023 with the GCC central banks, which have currencies pegged to the dollar, facing continuing pressure to raise rates in tandem to restrain inflation and prevent capital outflows," it said.
The rating agency expects insurers to benefit from higher interest rates in the medium term, due to the positive effects on yields for their cash and fixed deposits.
"Overall, we expect the Islamic insurance industry's net earnings to remain modest in 2022-2023," it said.
"Improving economic sentiment, ongoing infrastructure spending, new mandatory coverage, and overall higher insurance demand will benefit the Gulf Co-operation Council's Islamic insurers over the next two years," S&P said in a report.
Higher hydrocarbon prices, with its assumption of average Brent price of $100 per barrel for the rest of 2022 and $85 in 2023, will lead to accelerated economic growth in the oil-exporting region, it said.
"This should feed through to the Islamic (takaful) insurance sector, where we expect gross written premiums/contributions to expand about 10% in 2022 and 5-10% in 2023," it said.
However, the picture in individual markets may not be so positive. Last year was profitable overall for the sector but earnings were not evenly distributed.
Notably, Qatar's relatively small takaful sector remained the Gulf region's most profitable with insurers reporting a combined (loss and expense) ratio of lower than 80% (a lower combined ratio indicates a higher underwriting profit).
Meanwhile, the largest market, Saudi Arabia, saw weak results, with about two-thirds of insurers recording underwriting losses, leading to an overall combined ratio of about 103% compared with 98% in 2020.
"We anticipate that intense competition and an increase in claims frequency will continue to weigh on Islamic insurers' earnings in 2022, before a modest recovery in 2023, thanks to anticipated rate adjustments in loss-making lines and higher interest rates, which should boost investment returns," S&P said.
Ongoing pressure on earnings and capital has already resulted in some capital raising and consolidation in the two largest markets - Saudi Arabia and the UAE - in recent years and "we expect this trend to continue in 2022 and 2023," it said.
The upcoming regulatory - and accounting - related changes (such as International Financial Reporting Standard 17) will likely lead to rising operational costs, requiring insurers to upgrade their information technology systems and other internal processes. This will also reinforce the need for capital raising and mergers, it said.
In 2020, regional takaful and conventional insurers benefited from little or no exposure to Covid-19-related claims and saw fewer motor and medical claims due to movement restrictions.
However, the rating agency notes that motor and medical claims reached or even exceeded pre-pandemic levels in most GCC countries in 2021, as economies opened up and mobility increased.
At the same time, 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.
"We also expect that investment returns will remain volatile in 2022," it said.
Although the GCC's equity markets have performed better than many globally and are still in positive territory for the year to date, it notes that bond/sukuk prices have declined following an increase in interest rates.
"We now expect the US interest rates to increase above 3.5% by mid-year 2023 with the GCC central banks, which have currencies pegged to the dollar, facing continuing pressure to raise rates in tandem to restrain inflation and prevent capital outflows," it said.
The rating agency expects insurers to benefit from higher interest rates in the medium term, due to the positive effects on yields for their cash and fixed deposits.
"Overall, we expect the Islamic insurance industry's net earnings to remain modest in 2022-2023," it said.
