Key Takeaways
- After strong topline growth over 2022-2023, Islamic and Takaful insurers in the Gulf Cooperation Council (GCC) region continue to benefit from favorable growth prospects, mainly due to higher insurance demand in Saudi Arabia, which is the largest Islamic insurance market in the region.
- 2024 is set to be another profitable year for the sector. Net profits in 2023 had already reached a record of almost $1 billion, mainly due to rate adjustments in previously underperforming lines and higher investment returns.
- That said, we expect competition will pick up in some markets. This--together with anticipated interest rate cuts starting from September and potentially more volatile capital markets--could lead to a sharp decline in earnings in 2025 if Islamic insurers fail to maintain their underwriting discipline.
- While we expect overall credit conditions for Islamic insurers will remain stable over the next 6-12 months, consolidation will likely remain a hot topic among smaller and midsize players. About one-fifth of Islamic insurers in Saudi Arabia and about one-third in the United Arab Emirates (UAE) merged in recent years.
S&P Global Ratings expects GCC Islamic insurers will continue to benefit from several tailwinds over the next 6-12 months. Tailwinds include ongoing favorable economic conditions resulting in an increase in insurance demand, thanks to ongoing investments in infrastructure projects, population growth, and regulatory initiatives. That said, increasing competition and declining investment returns--resulting from the anticipated decrease in interest rates and potentially more volatile capital markets--could weigh on the industry's earnings over the next 12-18 months, in our view.
Geopolitical risk is rising. Even though we expect that the effects of the Israel–Hamas war will remain contained to the region, we note that the risk of regional escalation is increasing. Although this is not our base case, a regional escalation could impair business sentiment in the wider Middle East, including the GCC region, reduce growth prospects, and impair GCC insurers' investment portfolios.
Consolidation remains a hot topic. While we expect overall credit conditions for Islamic insurers will remain stable over the next 6-12 months, consolidation will likely remain relevant as many smaller and midsize Islamic insurers continue to report relatively weak earnings.
Saudi Arabia Continues To Outpace Other Markets
We expect the Islamic insurance sector in the GCC region will expand by about 15%-20% in 2024, with revenues exceeding $20 billion. We expect the Saudi market, similar to the past two years, will be the main driver of topline growth in the GCC region. This is because Saudi Arabia, the GCC region's largest Islamic insurance market, continues to benefit from higher economic growth. At the same time, authorities proceed with reducing the number of uninsured vehicles and have introduced new mandatory medical covers, leading to additional insurance demand and premium income.
The Islamic insurance sector in the GCC region expanded substantially over the past five years. Topline growth was particularly strong over 2022-2023, when the sector increased by about 20%-25% annually (see chart 1). This was mainly driven by the market in Saudi Arabia (see chart 2), which expanded by about 27% in 2022 and another 23% in 2023.
Chart 1
Chart 2
Islamic insurers' topline in GCC countries outside of Saudi Arabia cumulatively declined by almost 3% in 2023. The main reason was a decline in premium income in the UAE, the region's second-largest Takaful market, primarily due to consolidation in the industry and rate pressure affecting motor and other lines. That said, we expect the Takaful sector in the UAE will expand by 15%-20% in 2024 as motor rates increased substantially over the past 12 months, particularly following this year's major floods in Dubai and other parts of the UAE. At the same time, we anticipate that Takaful players in Bahrain, Kuwait, Oman, and Qatar will report more moderate growth rates of about 5%-10%.
Rate Adjustments And Strong Investment Returns Support Earnings
Half-year 2024 results suggest that net profits could further improve this year, after GCC Islamic insurers reported record results in 2023. The aggregate net profit in the sector improved to about $967 million in 2023, from about $100 million in 2022. This improvement was mainly driven by the Saudi market, whose underwriting results improved and investment income increased to about $690 million in 2023, from about $345 million in 2022, substantially contributing to overall earnings. We also note that, for the first time, all of Saudi Arabia's 25 listed insurers reported a net profit in 2023. This followed a tough 2021 and 2022, when more than half of Saudi insurers reported a net loss.
The Saudi insurance market experienced a material increase in premium income from motor lines. Underwriting results in 2023 benefited from rate adjustments in several lines and from Saudi authorities' decision to reduce the number of uninsured vehicles. More economic rates and additional business resulted in a stronger increase in gross premium income, compared with gross claims paid (see chart 3). Consequently, the net loss ratios of Saudi insurers' two largest lines--medical and motor insurance, which together contributed almost 81% to total premium income--improved materially in 2023 (see chart 4).
Chart 3
Chart 4
Topline results and net earnings were not distributed equally across the sector. The five largest of the 25 listed insurers in Saudi Arabia generated about 73% of total insurance revenues in 2023, up from 69% in 2022. Saudi Arabia's largest insurers, the Company for Cooperative Insurance (Tawuniya; A/Stable/--) and Bupa (not rated), had a combined market share of about 55% in 2023. Earnings concentration is similar, with the five largest insurers generating about 81% of total profits in Saudi Arabia in 2023. In our view, strengthening competition, lower investment returns due to declining interest rates, and rising geopolitical tensions in the region could lead to a sharp decline in earnings in 2025.
Similar to previous years, Qatar's Takaful market reported the most profitable underwriting results in the GCC region in 2023. The average combined (loss and expense) ratio was below 80% in 2023 (a lower combined ratio indicates higher underwriting profit). In Saudi Arabia, the overall combined ratio improved to about 95% in 2023, compared with more than 100% in 2022, when about two-thirds of insurers recorded underwriting losses. Even though the Saudi market reported an increase in net earnings to about $588 million at half-year 2024--from about $450 million over the same period in 2023--14 out of 25 listed Saudi insurers experienced a decline in underwriting results and profits at mid-year 2024, compared with the same period last year, suggesting an uptick in competition. We still believe that 2024 will be another strong year for the overall sector, with potentially even higher earnings than in 2023 (see chart 5).
Chart 5
Ratings Weather Rising Risks, More Consolidation Awaits
Apart from a few positive outliers, our credit ratings on GCC Islamic insurers remained broadly stable over the past 18 months. We do not expect any major rating actions over the next 6-12 months, as most rated insurers are sufficiently capitalized. Total shareholders' equity in the sector increased to about $7.6 billion in 2023, from $6.6 billion in 2022, thanks to profitable earnings and several capital increases. The key risks to credit conditions for Islamic and conventional insurers in the GCC region comprise:
- A worsening geopolitical situation in the region; and
- An increase in competition, which--together with lower investment returns--could impair earnings and capital buffers.
A regional escalation of the Israel-Hamas war would be economically, socially, and politically destabilizing for the entire GCC region and its banking systems. Combined with slow global economic growth, this could impair revenue growth and increase investment volatility for GCC Islamic and conventional insurers alike. In our view, a prolonged conflict, which is not our base case, would have a pronounced effect on asset values and investment returns. In such a scenario, we expect our ratings on less capitalized Islamic and conventional insurers or insurers with material exposure to equities and other high-risk assets could come under pressure.
Strong competition and increasing regulatory demands already led to several mergers, with more to come. Consolidation is particularly prevalent among smaller and midsize players in Saudi Arabia and the UAE. Over the past five to six years, the number of listed Saudi insurers declined by about 20% to 27, from 34. We forecast that mergers, mainly in Saudi Arabia, the UAE, and Kuwait will continue as several Islamic insurers still fail to meet the required solvency capital requirements.
Related Research
- GCC Insurers Plow Ahead As Geopolitical Tensions Intensify, April 17, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Emir Mujkic, Dubai + (971)43727179; emir.mujkic@spglobal.com |
| Secondary Contacts: | Mario Chakar, Dubai +971-4-372-7195; mario.chakar@spglobal.com |
| Sachin Sahni, Dubai (971) 4-372-7190; sachin.sahni@spglobal.com | |
| Additional Contact: | Insurance Ratings EMEA; Insurance_Mailbox_EMEA@spglobal.com |
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