The ‘very high’ competition in the overcrowded GCC insurance market will continue to weigh on earnings of the insurance firms in 2021, S&P Global Ratings has said.
In a report released on Thursday, S&P said that unlike in the corporate sector, where the pandemic led to widespread downgrades in 2020, its credit ratings on Islamic (takaful) and conventional insurers in the GCC have remained broadly stable over the past 18 months, supported by relatively strong capital buffers.
‘Indeed, we have taken several positive rating actions on takaful companies so far this year. Our outlook on the sector for the next 12 months remains stable. However, given that risks related to the pandemic persist, we could take rating actions in the event of a sharp decline in asset prices, unexpected and severe technical losses, or governance and internal control failures,’ the ratings agency said.
S&P said gross written premium/contribution growth will likely remain weak in most GCC markets in 2021. Amid weaker economic conditions, gross written premium growth has been relatively modest in most GCC markets, partly from lower business activity and increased competition among takaful and conventional insurers in recent years.
‘This has particularly been the case in motor and medical lines, which together make up more than 60 per cent in most GCC markets. Slowing population growth across the GCC, ongoing pressure on rates, and a drop in new car sales in 2020 led to reduced insured values. Based on current market conditions and first-quarter 2021 results, we expect this downward trend to continue throughout the year,’ S&P said.
S&P expects an economic recovery in the GCC in 2021, supported mainly by the increase in oil prices and the vaccine roll-out. However, slow vaccination progress in some parts of the world and new variants could dampen the recovery.
An uneven recovery, ongoing cost-saving measures in many industries, and a shift to less business travel has further increased the pressure in key sectors such as real estate, retail, transportation, and hospitality, S&P said.
‘We believe these factors, combined with very intense competition in the insurance sector, are weighing on growth prospects for gross written premiums of both takaful and conventional insurers,’ the ratings agency said.
‘Overall, while we expect growth in the insurance sector, we think it will be unevenly spread, with larger conventional insurers taking more of the gains than the takaful,’ S&P added.