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The decline in population in the Gulf Cooperation Council (GCC) region, coupled with high competition, is expected to weigh on growth prospects and earnings of insurers, according to S&P Global Ratings.
“Although we expect an economic recovery in 2021, due to higher oil prices and the rollout of the COVID-19 vaccine in the region, a decline in population and ongoing pressure in key sectors such as real estate, retail and hospitality will hamper [growth in gross written premiums],” the agency said in report released on Monday.
Lower consumer spending could also have short-term impact on demand for non-mandatory policies, while insurance markets in the region remain overcrowded.
However, insurers’ ratings are likely to remain broadly stable this year despite ongoing economic uncertainty, mainly due to the robust capital buffers.
About 84 percent of insurers in the GCC maintain capital adequacy above the “AAA” confidence level in S&P’s capital model, compared with about 59 percent across all of Europe, Middle East and Africa (EMEA).
Analysts had earlier forecast that population in the UAE and other parts of the GCC could decline as a result of job losses and redundancies caused by the coronavirus pandemic.
Flat growth
While the UAE's insurance market remains the largest and one of the most profitable in the region, the growth of gross written premiums (GWP) has been relatively flat.
“We estimate an overall GWP decline of almost 2 percent in 2020, particularly due to lower premium income from motor and life/savings business,” Emir Mujkic, analyst at S&P said.
This will likely remain relatively flat in 2021 due to economic uncertainty and a decline in the expat population in Dubai and other emirates in 2020-2021.
“We forecast a modest decline in net earnings in 2021 as claims return to normal and investment returns remain subdued. Overall, we anticipate the combined (loss and expense) ratio weakening to about 92 percent in 2021 from about 90 percent in 2020.”
For Saudi Arabia, the regulatory initiatives will continue to drive growth, according to the report.
“We forecast GWP growth of up to 5 percent in 2021, supported by the Hajj and Umrah Medial Insurance Program, the Inherent Defects Insurance Scheme, and higher motor insurance penetration.”
Rate increases
The report also predictsed some rate increases in medical insurance this year after a decline in GWP in 2020, “since public hospitals will likely start billing insurers for their services.”
Overall, however, there will be a modest decline in profitability in Saudi Arabia in 2021, with the combined ratio, a measure of profitability, at about 97 percent in 2021 compared with about 95 percent in 2020.
In general, for GCC insurers, investment losses remain a top risk, S&P noted.
“Low returns on cash deposits have prompted some insurers to increase their exposure to equities or other high-risk assets.”
Although financial markets recovered in the second half of 2020, a potential return of volatility in capital markets could weaken credit conditions for insurers in 2021, particularly if central banks gradually lift forbearance measures later this year, it said.
Further stress on liquidity
There could also be an increase in receivables and write-offs.
“We expect premium collections to remain slow as many businesses delay their payments in an attempt to survive. This will likely lead to an increase in receivables and write-offs, putting further stress on liquidity, asset quality and consequently credit conditions for insurers, in our view.”
Slowdown in premium growth presents a low to moderate risk impact on insurers, as weaker economic activity has stoked competition, particularly in motor and medical lines, which together make up more than 60 percent of total non-life GWP in each market.
The ratings agency expects real GDP in the GCC countries to recover to about 2 percent in 2021 on average, after the sharp contraction in 2020. However, key sectors, particularly real estate, hospitality and retail, will remain under pressure this year, the report noted.
(Reporting by Brinda Darasha; editing by Cleofe Maceda)
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