Despite a grim economic outlook, insurers in Saudi Arabia may have benefited from the recent coronavirus lockdown and are likely to post solid results for the first half of the year, according to global ratings agency S&P. However, the agency cautions that insurers should expect challenges ahead.

The movement restrictions imposed by the government to curb the spread of the virus in March have resulted in fewer motor and medical claims, thereby compensating the slowdown in investment returns, ratings agency S&P said on Tuesday.

“We anticipate that the sector will report strong overall underwriting results in first-half 2020, due to a sharp reduction in motor and medical claims offsetting some weaker investment results,” it said.

However, insurers will face challenges ahead, as attempts to reopen the economy and lift restrictions, coupled with the increase in value-added tax (VAT), as well as social benefit cuts, could put pressure on growth and earnings prospects in the second half of the year. This will further increase competition and accelerate consolidation in the market.

“With the lifting of lockdown measures in late June, we expect that motor and medical claims will pick up, as traffic flow increase and policyholders start returning to hospitals for non-urgent medical services in the coming months,” said S&P Global Ratings credit analyst Emir Mujkic.

“The increase in VAT to 15 percent from 5 percent from July 1 and cuts in social benefits for citizens could further pressure consumer spending,” the ratings agency said in its report.

Despite the anticipated slower premium growth and weaker profitability in the second half, insurers could still remain profitable overall this year.

“We expect to see accelerated consolidation in the sector over the coming quarters, given that there is a relatively large number of small and loss-making insurers,” Mujkic added.

In late March, Saudi Arabia implemented a nationwide curfew and imposed restrictions on economic and commercial activities, in a bid to limit the spread of coronavirus.

According to motor insurance service company Najm, the number of traffic accidents in Saudi Arabia dropped 59 percent in March. The number of incidents dropped to its lowest point between March 23 and March 31, shortly after the kingdom imposed the curfew.

The curfew has recently been lifted, as the government attempts to restart the economy, but bans on pilgrimages and international travel remain in place.

(Writing by Cleofe Maceda; editing by Seban Scaria)

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