Dubai: GCC countries are expected to witness strong growth in the insurance sector this year, despite ongoing regulatory and competitive challenges and slow economic activity in some GCC countries.
“We anticipate that insurance markets in the GCC will continue to grow in 2018, despite ongoing slow economic activity in some countries in the GCC,” Emir Mujkic, a Standard & Poor’s analyst, said in a recent report.
“However, gross premium growth in the GCC will continue to highly dependent on government initiatives such as infrastructure developments, privatisation of medical insurance, [the] adoption of actuarial pricing, and minimum rates for compulsory motor and other lines.”
New regulations with higher capital requirements and other demands are expected to add to costs and increase pressure on profitability for some insurers. Some insurers will have to adapt their business models, and others, particularly in the UAE, will need to raise additional funds or look for alternative ways to comply with the new regulations. As insurers try to improve economies of scale, S&P analysts see some increased pressure on the industry to consolidate in 2018.
S&P has forecast insurance sector in Oman will record the strongest year-on-year growth in 2018 — at more than 10 per cent — due to the introduction of new compulsory medical cover for expatriates.
The insurance market in the UAE is also likely to see a growth rate of around 10 per cent in 2018, due to ongoing population growth and other increases in insurable risks, for example from infrastructure developments such as the Expo 2020 in Dubai.
However, as in Kuwait, revenue growth in the UAE is likely to be lower this year compared to 2017, when new medical covers were introduced in both markets and minimum motor rates were adopted in the UAE.
Saudi Arabia’s premium growth is expected to moderate in 2018 following premium growth rates of about 20 per cent per year between 2013 and 2015, when new medical covers and regulations leading to higher premium income were introduced.
“We forecast year-on-year premium growth in 2018 to be modest,” Mujkic said. “In part, this is because both medical and motor covers are already somewhat expensive by regional standards. That said, motor premium volumes may grow as Saudi women take to the roads for the first time in the second half of the year, and as the traffic police endeavour to increase insurance utilisation by fining uninsured drivers.”
Analysts anticipate that profitability of GCC insurers is likely to be mixed in 2018, and lower than in previous years, due to increasing operating costs, resulting from new regulations in some markets and ongoing high competition levels. In addition to thin underwriting margins, more volatile investment returns may put further pressure on earnings.
“We also believe that the adoption and enforcement of more rigorous regulations will lead to greater cost pressure and [a] widening gap in credit conditions between the largest and smaller companies [by gross written premium] in each market,” said Mujkic.
S&P expects large and more diversified insurers to continue to enjoy a competitive advantage, leading to material profitability imbalances between them and smaller companies, as well as those that do not have access to profitable commercial risks, which are highly reinsured in the international market.
Following strong rate increases for motor and medical covers over the past two years, leading to year-on-year net income growth of nearly 200 per cent in Saudi Arabia in 2016 and around 50 per cent in the UAE in 2017, analysts expect that overall underwriting profitability in both markets will be more moderate in 2018.
“One reason for our assumption is that the insurance regulator in the UAE has set new minimum motor insurance rates for 2018, which are about 20 to 25 per cent lower than those in 2017 and will consequently lead to lower profitability,” Mujkic said.
- Emir Mujkic | S&P analyst
Additionally, UAE insurers will also be able to offer various discounts to loyal and accident-free drivers, as well as to customers that insure fleets, he said. The application of these discounts will allow insurers to price some of their policies even below the set minimum rates.
Insurers in Saudi Arabia will also be compelled to offer discounts to accident-fee drivers. An extension of benefits for policyholders under the new unified medical policy from July 1 onward will require insurers to price this new cover without existing data.
Another likely squeeze on profit margins will come from the introduction of VAT in both Saudi Arabia and the UAE in January 2018, the impact of which will depend on each insurers’ product mix.
Although the VAT rate is set at only 5 per cent at the moment and the amount per policy may be relatively low, analysts believe that this will still have an impact on already-tight profit margins due to the large volume of policies affected.
