GCC Insurers In 2021 Robust Capital Supports Credit Quality - Emir Mujkic Dubai - S&P Global
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GCC Insurers In 2021 Emir Mujkic
Dubai
emir.mujkic@spglobal.com
Robust Capital Supports Credit Quality
Feb. 22, 2021
Key Takeaways – We expect our ratings on insurers in the Gulf Cooperation Council (GCC) to remain broadly stable in 2021, mainly thanks to robust capital buffers and despite ongoing economic uncertainty relating to the COVID-19 pandemic. – Real GDP in the GCC countries will likely recover to about 2% in 2021 on average, after the sharp contraction in 2020, but we believe that key sectors, particularly real estate, hospitality, and retail, will remain under pressure this year. – Ongoing high competition, a contraction in population of about 4% across the GCC on average, and economic uncertainty will weigh on growth prospects and earnings, while elevated asset risk could lead to further volatility in the coming quarters. – With the relatively large number of insurers in the region, some of which are small or posting losses, we expect to see further capital raising and consolidation, particularly in Kuwait and Saudi Arabia where regulators may introduce higher capital requirements.
GCC Insurers | Credit Quality Is Largely Stable
– With a few exceptions, our ratings on GCC insurers remained broadly stable in 2020 and we expect this to continue in 2021, supported by
robust capital buffers and technical profitability.
– Negative rating actions could follow a sharp decline in asset prices, unexpected severe technical losses, or company-specific
governance/internal control failures.
GCC Insurers Rating Distribution GCC Insurers Outlook Distribution
35% 80%
30% 70%
60%
25%
50%
20%
40%
15%
30%
10%
20%
5% 10%
0% 0%
AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- Stable Negative Positive CW Neg. CW Dev.
Feb. 2020 Feb. 2021 Feb. 2020 Feb. 2021
Data as of Feb. 2, 2021 Source: S&P Global Ratings. Data as of Feb. 2, 2021 Source: S&P Global Ratings.
3Capital Adequacy | A Key Rating Strength
GCC Insurers’ Capital Adequacy In Our Risk-Based Capital Model
AAA – About 84% of insurers in the GCC maintain
10% capital adequacy above the ‘AAA’ confidence
AA
level in our capital model, compared with
6% BBB or below about 59% across all of EMEA.
– However, the overall size of most insurers'
capital is relatively small and can therefore
quickly fluctuate.
– Strong growth, single events, or accumulated
losses have been the key reasons for a
decline in capital buffers at some insurers in
recent years.
84%
Source: S&P Global Ratings.
4Industry And Country Risk | Country Risk Remains Relatively High
Insurance Industry And Country Risk Assessments (IICRAs) In GCC
60% – Economic and/or political risks remain
moderately high in Kuwait and Saudi Arabia,
UAE
50% and high in Bahrain and Oman.
Qatar
Saudi Arabia – Insurance markets in the GCC typically
Kuwait benefit from low product risks and
40%
satisfactory growth and earnings prospects.
– Key risks usually relate to potential volatility
30%
of earnings and capital stemming from
exposure to high-risk assets and intense
20% competition.
Bahrain – We also note that most insurance markets in
Oman
10% the region are overcrowded and
concentrated, with the top five insurers
generating more than 60% of overall profits
0% and GWP.
Very low risk Low risk Intermediate Moderately High risk Very high risk
risk high risk
The latest details of our IICRAs can be found in "Insurance Industry And Country Risk Assessment Update: November 2020," published Nov. 17, 2020.
5Key Risks In 2021 | Asset Risk Remains On Top
Risk factor Description Impact on insurers
Investment losses 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
High
weaken credit conditions for insurers in 2021, particularly if central banks gradually lift forbearance measures later this
year.
Increase in receivables We expect premium collections to remain slow as many businesses delay their payments in an attempt to survive. This will
and write offs likely lead to an increase in receivables and write offs, putting further stress on liquidity, asset quality, and consequently Moderate
credit conditions for insurers, in our view.
Weaker underwriting Despite fewer claims in 2020, due to movement restrictions and pandemic-related claims not being covered under most
results policies, an increase in competition and resumption of nonessential medical treatment could cause claims to rise to more
normal levels and, consequently, lead to weaker but still profitable underwriting results in 2021. While business interruption Low to moderate
(BI) claims related to COVID-19 are typically not covered under property policies, we still anticipate higher-than-expected BI
payouts in 2021 relating to claims in 2020, further affecting earnings.
Decline in reinsurance Low reinsurance capacity in the region has led to strong rate increases and we expect this will continue in 2021. Although
capacity this will benefit reinsurers' top line and earnings, it could squeeze primary insurers' underwriting margins further. A Low to moderate
potential shift to lower-rated or unrated reinsurers in search of lower rates could also increase credit risk.
Slowdown in premium Weaker economic activity has stoked competition, particularly in motor and medical lines, which together make up more
growth than 60% of total non-life gross written premium (GWP) in each market. 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 Low to moderate
key sectors such as real estate, retail, and hospitality will hamper GWP growth. Lower consumer spending could also have
short-term implications on demand for non-mandatory policies.
Sovereign risk Weakening economic conditions and sovereigns' credit quality could further constrain insurers’ creditworthiness in
Low
countries with relatively lower sovereign ratings, such as Bahrain and Oman.Opportunities | Greater Awareness Could Fuel Demand
Opportunity Description
A large uninsured population A higher awareness of insurance products and need for protection among the population could increase the
demand for medical and critical illness policies covering COVID-19 and other pandemics. Business owners
could try to obtain business interruption policies that also cover against pandemic-related risks, which was
earlier considered optional.
New product development We understand that some regulators in the GCC are assessing the impact of insurance rates if pandemic
risks were covered. Insurers could develop new insurance and non-insurance-related services that cover
changes in lifestyles, since a larger number of people are working from home.
Increased automation The pandemic has accelerated the development of digital sales and claims processing in the GCC. More
and digital distribution automation and focus on digital sales platforms to offset social-distancing measures could ease client
access in the future.
Stricter regulations We believe that regulators in the region have enhanced their data collection and regulatory oversight
following the outbreak of COVID-19. Stricter regulations and more effective regulatory oversight could
improve discipline and transparency and also identify weak insurers, which could accelerate the industry's
consolidation.Economic Growth | GCC Insurers Still Stand To Benefit
– We expect real GDP in the GCC to recover in 2021 but with key sectors, particularly real estate, hospitality, and retail, likely remaining
under pressure.
– Despite uncertainties regarding the pace of economic recovery, insurers will likely benefit from ongoing infrastructure spending, new
mandatory coverage, and potentially higher insurance demand.
Real GDP Growth Forecast 2020-2023
8 2020e
6 2021f
4 2022f
Real GDP growth (%)
2 2023f
0
-2
-4
-6
-8
-10
United Arab Emirates Saudi Arabia Qatar Kuwait Bahrain Oman
e--Estimate. f--Forecast. Source: S&P Global Ratings.
8Country-Specific Trends UAE, Saudi Arabia, Kuwait, Qatar, Oman, and Bahrain
United Arab Emirates | Market Will Likely Remain Highly Profitable
– The UAE's insurance market remains the largest and one of the GWP Distribution UAE 2018-2021
most profitable in the GCC. However, amid weaker economic
conditions, GWP growth has been relatively flat. We estimate an 14
overall GWP decline of almost 2% in 2020, particularly due to
lower premium income from motor and life/savings business. 12
– While there could be some rate increases for motor policies in
the second part of the year and for certain reinsurance lines, 10
GWP in USD (bil.)
GWP growth will likely remain relatively flat in 2021, due to
economic uncertainty and a decline in the expat population in 8
Dubai and other emirates in 2020-2021.
6
– Insurers' operating performance strengthened in 2020, thanks
to fewer motor and medical claims. We forecast a modest
decline in net earnings in 2021 as claims return to normal and 4
investment returns remain subdued. Overall, we anticipate the
combined (loss and expense) ratio weakening to about 92% in 2
2021 from about 90% in 2020.
0
– Regulatory oversight will likely strengthen, thanks to the 2018 2019 2020e 2021f
merger of the insurance authority and central bank, which
could lead to stricter enforcement of regulations, increasing P&C Insurance Medical insurance Life and savings insurance
pressure on smaller and weaker insurers. e--Estimate. f--Forecast. Sources: UAE Insurance Authority, S&P Global Ratings estimate/forecast.
10Saudi Arabia | Regulatory Initiatives Will Continue To Fuel Growth
– New mandatory medical coverage has supported GWP growth GWP Distribution Saudi Arabia 2018-2021
in recent years. We estimate that overall GWP increased by 3%-
5% in 2020, thanks to higher motor and reinsurance rates. 14
– We forecast GWP growth of up to 5% in 2021, supported by the
Hajj and Umrah Medial Insurance Program, the Inherent 12
Defects Insurance Scheme, and higher motor insurance
penetration. We also foresee some rate increases in medical 10
GWP in USD (bil.)
insurance this year after a decline in GWP in 2020, since public
hospitals will likely start billing insurers for their services. 8
– Overall, we forecast a modest decline in profitability in 2021,
6
due to uncertain economic conditions and more normalized
claim levels, with the combined ratio at about 97% in 2021
compared with about 95% in 2020. 4
– Following recent merger news, consolidation will likely continue 2
this year, given that roughly one-third of the 30 active primary
insurers are still making losses. This could accelerate if, as
0
anticipated, the regulator sets higher minimum capital 2018 2019 2020e 2021f
requirements, requiring companies to raise additional capital.
P&C insurance Medical insurance Life and savings insurance
e--Estimate. f--Forecast. Sources: Saudi Central Bank (SAMA), S&P Global Ratings estimate/forecast.
11Kuwait | New Stricter Regulations Could Accelerate M&A
– Insurers in Kuwait tend to maintain lower capital buffers than GWP Kuwait 2018-2021
peers in other markets, which makes their credit quality more
sensitive to fluctuations in capital and earnings and a weak 1.6
economy. Anticipated new and tougher regulations could lead
to some capital raising and consolidation in 2021. 1.4
– We estimate that the insurance market expanded by about 5% 1.2
in 2020 mainly due to an increase in premiums from the
GWP in USD (bil.)
medical scheme for retirees (AFYA), which is written by only one 1
insurer.
– We expect GWP growth of about 5% in 2021, as the number of 0.8
retirees increases, leading to higher GWP in the AFYA scheme.
We anticipate that government-sponsored infrastructure 0.6
projects and higher reinsurance rates will also support GWP
growth. 0.4
– As in other markets, a decline in motor and medical claims led
to stronger underwriting results in 2020. We expect the overall 0.2
combined ratio for the market to settle at 95%-97% in 2021.
0
2018 2019 2020e 2021f
e--Estimate. f--Forecast. Sources: S&P Global Ratings. Breakdown by line of business is not available.
12Qatar | Lifting Of Boycott Could Be Positive For Insurers
– In 2020, market growth in Qatar was fueled by rate increases GWP Qatar 2018-2021
for large medical accounts and higher reinsurance rates,
resulting in GWP growth of about 5%. 2
– We anticipate a similar growth rate in 2021, due to higher public
expenditure to diversify the Qatari economy, further preparation
for the 2022 FIFA World Cup, and removal of restrictions 1.5
between Qatar and Saudi Arabia, as well as with other
GWP in USD (bil.)
countries that severed relations with Qatar, including Bahrain,
Egypt, and the UAE.
– Qatari insurers are likely to benefit from increased regional 1
travel, tourism, and possibly trade, which could lead to an
increase in insurable risks and consequently GWP. A potential
introduction of mandatory medical cover for inbound travelers
and residents could support GWP growth in the coming years. 0.5
– We expect the market to report combined ratios of 96%-98%
for 2020-2021; the ratio weakened to about 102% in 2018, due
to high competition and company-specific issues, but has
0
improved in recent years.
2018 2019 2020e 2021f
e--Estimate. f--Forecast. Source: S&P Global Ratings. Breakdown by line of business is not available.
Data does not include GWP from QIC’s international business.
13Oman | More Normal Claims Levels Will Weigh On Earnings
– Weaker economic conditions and an estimated decline in the GWP Oman 2018-2021
expat population of about 12% (close to 230,000 people) led to
a decline in GWP by 4%-5% in 2020. 1.4
– Although Oman is planning to implement a new compulsory
health insurance scheme that should boost GWP in the coming 1.2
years, we forecast a further modest decline in GWP in 2021.
1
– We expect the market to report a significant improvement in
GWP in USD (bil.)
profitability of about 50% in 2020 versus 2019, thanks to fewer
claims because of strict COVID-19-related lockdowns. 0.8
– In 2021, profitability will likely decline due a more normalized
level of claims and potential volatility on the asset side. The 0.6
government will introduce a value-added tax of 5% from April
2021, which could create additional one-off costs for insurers. 0.4
Nevertheless, we anticipate the market will report a combined
ratio of 92%-95% in 2021. 0.2
0
2018 2019 2020e 2021f
e--Estimate. f--Forecast. Source: Oman Central Bank, S&P Global Ratings.
14Bahrain | Competition Will Remain High In The Absence Of Growth
– We expect that overall GWP declined in 2020 due to lower GWP Bahrain 2018-2021
economic activity, tourism from Saudi Arabia and other
countries in the region, and sales of new cars affecting 1
premium income in motor and other lines.
– In our view, GWP growth in 2021 could be flat at best because of
0.8
ongoing weaker economic conditions. However, a potential
introduction of a mandatory medical scheme could support
GWP in USE (bil.)
GWP growth in the coming years.
0.6
– With 36 licensed insurers, competition in the relatively small
market will remain high. However, underwriting results will
likely stay profitable overall, and we expect the market average
0.4
combined ratio to be in the 95%‐97% range in 2020-2021.
0.2
0
2018 2019 2020e 2021f
e--Estimate. f--Forecast. Sources: Bahrain Central Bank, S&P Global Ratings estimate/forecast.
15Related Research
– S&P Global Ratings COVID-19 Research Page
– Expat Exodus Adds To Gulf Region's Economic Diversification Challenges, Feb. 15, 2021
– GCC Corporate And Infrastructure Outlook 2021: Proceeding With Caution, Feb. 2, 2021
– EMEA Insurance Outlook 2021 – Choppy Waters Ahead, Nov. 17, 2020
16Analytical Contacts
Emir Mujkic Sachin Sahni
Dubai Dubai
emir.mujkic@spglobal.com sachin.sahni@spglobal.com
Mario Chakar Liesl Saldanha
London London
mario.chakar@spglobal.com liesl.saldanha@spglobal.com
Varun Bhalla
Dubai
varun.bhalla@spglobal.com
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