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Islamic insurers face a turbulent year

While growth prospects of Islamic insurers in the GCC remain favourable, weak profitability has been an issue for the sector

Several takaful insurers in the Gulf report a decline in earnings this year
Several takaful insurers in the Gulf report a decline in earnings this year

Although growth prospects of Islamic insurers (takaful) in the GCC remain favourable in 2022 and 2023, they are preparing to adopt new accounting standards that will weigh on earnings of many players in the industry.

They are supported by an uptick in economic activity, ongoing infrastructure spending and new mandatory medical covers, but contending with intense competition, volatility in capital markets and an increase in costs.

The overall industry had a strong start to 2022 with Islamic insurers in Saudi Arabia – which contribute slightly more than 85 percent of total premiums for all GCC Islamic insurers – recording premium growth of almost 24 percent in the first half of the year compared with the same period in 2021.

However, growth in other markets has been more modest and the second largest market, the UAE, even reported a year-on-year decline in premium income of about 9 percent in the first half of the year.

Despite a premium decline and slower growth in other markets in the region, we anticipate that the overall Islamic insurance industry will expand about 10–15 percent in 2022, with Saudi Arabia remaining the key driver for growth and the region’s largest market.

The bad news is that relatively weak profitability has been a key issue for the sector in most markets.

Qatar’s comparatively small takaful sector enjoys fairly modest competition, and therefore remains the region’s most profitable market.

Saudi Arabia reported a significant decline in earnings in 2021 and in the first half of 2022, with about two-thirds of insurers recording underwriting losses. 

Intense competition and an increase in claims frequency will continue to weigh on earnings of the sector in Saudi Arabia this year, before we see a modest recovery in 2023, thanks to anticipated rate adjustments in loss-making lines.

In addition, higher interest rates should boost investment returns and overall earnings. 

Ongoing pressure on earnings and capital has already resulted in some capital raising and consolidation in Saudi Arabia and the UAE in recent years and this trend is expected to continue in 2022 and 2023.

Additionally, upcoming regulatory and accounting-related changes will likely lead to rising operational costs, requiring insurers to upgrade their IT systems and other internal processes.

This will also reinforce the need for capital raising and mergers.

The Saudi Central Bank’s new minimum capital requirement of SAR300 million ($79.8 million) – an increase from from SAR100 million – over the next three years is designed to encourage consolidation and result in fewer but stronger companies to meet the country’s Vision 2030 objectives.

Over the past five to six years, the number of active insurers in the kingdom has reduced almost 20 percent to 28 from 34.

Following some merger announcements within the industry in the UAE this year, we could see a decline in listed takaful players to six from nine entities. 

Increased scale could help dilute insurers’ fixed costs, while also reducing top and bottom line volatility.

Further capital raising and consolidation would also support capital buffers.

Emir Mujkic‎ is director and lead analyst, insurance ratings, S&P Global Ratings