The growth prospects of takaful (Islamic insurers) will be supported by increasing non-oil activity over the next two years, but intense competition and surging motor and medical claims will continue to constrain earnings, according to a Ratings Direct update from S&P.

The ratings agency said weak profitability, new regulation and higher capital requirements will prompt further capital raising in Saudi Arabia and the UAE over the next year.

An increase in motor and medical claims will continue to constrain earnings in the Saudi Arabian market if insurers do not adjust premium rates, S&P said.

Gross written premiums or contributions in Islamic insurance will grow by 10% in 2022 and between 5-10% in 2023, the update said, but the picture may be less positive in individual markets.

Qatar’s takaful sector remained the region’s most profitable, with insurers reporting a combined loss and expense ratio of lower than 80%, with a lower combined ratio indicating a higher underwriting profit, S&P said.

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.

S&P 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.

“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 it also expected further consolidation in the UAE, following the announcement of the merging of Dubai and Abu Dhabi-listed Dar Al Takaful and Wataniya, which was completed last month.

“In our view, increased scale could help dilute insurers' fixed costs, while reducing top-and bottom-line volatility. We also expect further capital raising and consolidation will support capital buffers,” the ratings agency added.

Three Dubai-listed Islamic insurers announced their financial results yesterday (Monday). Takaful Emarat faces doubts about its ability to continue as a going concern, while Arab Islamic Insurance (Salama) has accumulated losses of AED 383.9 million ($104.5 million).

Dubai Islamic Insurance and Reinsurance Company (AMAN) has accumulated losses that are 59% of capital.

(Reporting by Imogen Lillywhite; editing by Daniel Luiz)