Market Analysis: GCC Insurance Sector Balances Growth Opportunities with Key Challenges
S&P Global Ratings expects credit conditions for rated insurance companies will broadly remain stable in 2018, despite slower top line growth and lower profitability.
Long-term prospects remain stable
While growth in insurance premiums is likely to be slower in some GCC markets in 2018 compared with previous years, longer-term growth prospects of the industry remain satisfactory. A growing population and improving insurance awareness are driving the gradual growth of GCC insurance markets.
In 2017, the UAE had the region’s largest and fastest growing insurance sector, recording an estimated 12% year-on-year growth in gross written premiums (GWP). While we expect double-digit growth in the UAE in 2018, some other markets in the region are likely to experience relatively slow growth, mainly due to challenging economic and geopolitical conditions.
Insurance sector growth is highly dependent on government-driven initiatives such as infrastructure and development spending, new regulations and the introduction of new mandatory (medical insurance) covers. The possible implementation of mandatory medical covers in the UAE’s Northern Emirates, the planned privatisation of medical insurance in Kuwait and Qatar and increasing health insurance penetration in Saudi Arabia will favourably impact the sector in the medium term.
Life insurance sector is underdeveloped
Unlike in more developed markets where the proportion of premium income from life insurance is larger or similar to non-life insurance, the majority of premiums in the GCC comes from the non-life sector. Motor and medical lines are key contributors of non-life insurance in the GCC, contributing at least 50% of total non-life premiums.
This points to opportunities for growth in life insurance.
For example, while premium income from life insurance in the UAE stood at about 25%, life insurance premiums in Saudi Arabia and Qatar contributed less than 5% of the total sector GWP in 2017. This is largely due to cultural reasons, the relatively low insurance awareness as well as the large proportion of expats who may have savings products in their home countries.
To bring more transparency and credibility to the market, the UAE Insurance Authority issued draft regulations for life and family takaful players in 2017. Although they are expected to come into effect over the next two years, regulations not only require additional disclosures for enhanced transparency but put caps on commissions paid on policies to minimize mis-selling. These regulations are expected to be a game-changer for the market, particularly changing how life insurance is marketed and sold in the UAE. While there could be some initial implementation challenges, these regulations are expected to improve consumer confidence in local insurance market which would also boost life premiums income for insurers.
GCC Insurance penetration below emerging markets average
The average insurance penetration across the GCC countries was about 2.3% in 2017, below the average penetration in global emerging markets at 3.2% and well below the global average of 6.2%. However, insurance penetration in individual GCC markets differs greatly from country to country with the UAE average at 3.3%, broadly in line with other emerging markets, and Kuwait’s average at 1.3%. This leads us to believe that as awareness about the importance of insurance increases and various governments gradually introduce policies, insurance penetration will continue to increase, albeit slowly.
GCC Insurers profitability remains volatile
In an assessment of listed insurance companies across the GCC, we found insurers’ profitability, excluding the UAE, has been on a downward trend since 2015. Perhaps most striking is the decrease in profitability of listed insurers in Saudi Arabia, which fell from about USD580 million in 2016 to approximately USD380 million in 2017 – mainly due to weaker results of two market-leading companies.
The insurance sector in Qatar suffered a large drop in profitability in 2017 given the impact of natural disasters that hit the US on the country’s largest insurer, Qatar Insurance, and the Qatar embargo. While insurance markets in all GCC countries are generally still profitable, S&P Global Ratings expects the trend of decreasing profitability to continue in 2018 and 2019.
Most markets are generating profits, however the operating performance of non-life GCC insurers remains volatile and highly susceptible to government regulations and profitable investment returns. In our view, the pressure on insurers’ profitability will continue and we are likely to see companies raise funds or look for alternative methods to comply with new regulations, potentially leading to more industry consolidation.
Geopolitical risks and fluctuations in global equity and commodity prices could also contribute to greater volatility since investment returns typically contribute a significant share of insurers’ earnings.
VAT is proving to be a challenge
The rollout of VAT across the GCC is expected to be a key challenge for insurance companies. Insurers in the UAE, where VAT was introduced from 1 January 2018, are facing a dual challenge when recovering an estimated VAT liability in excess of AED 700 million on policies written in 2017 and maturing in 2018.
Firstly, the majority of policies in the UAE are retail so insurers are weighing up the benefit of reclaiming VAT on thousands of small individual policies requires a significant amount of administration. In addition, many insurers did not include a clause regarding VAT in their policies, limiting the companies’ right to recover VAT from policy holders.
S&P Global Ratings expects this to impact UAE insurers profitability in 2018 as not all VAT liability may be recoverable. In addition, life insurers are likely to see a surge in acquisition costs given brokers’ commissions are subject to VAT but not claimable since life insurance is exempt from VAT.
The introduction of mandatory medical covers, economic diversification, a growing population and improving insurance awareness all positively support GCC insurance markets. However, a slowdown in government spending and economic challenges have resulted in tighter spending, which, together with the complications of VAT, are widening the gap between the region’s large and small insurers with the potential for more consolidation in the market.
Emir Mujkic and Sachin Sahni are insurance analysts at S&P Global Ratings, which is a member of The Gulf Bond and Sukuk Association.