GCC Insurers In 2022: More Capital Market Volatility And Intense Competition Point To Earnings Headwinds - S&P Global
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GCC Insurers In 2022: Emir Mujkic
Dubai
emir.mujkic@spglobal.com
More Capital Market Volatility And Intense Competition
Point To Earnings Headwinds
March 2, 2022
This report does not constitute a rating actionKey Takeaways – Profitable earnings and robust capital buffers continue to support rated Gulf Cooperation Council (GCC) insurers’ credit profiles. However, potentially more volatile capital markets and ongoing intense competition will increase pressure on earnings in 2022. – The region’s ongoing economic recovery from the COVID-19 pandemic, thanks to higher oil prices, government spending, and increasing activity in the non-oil sector, will also boost insurers’ growth prospects. – Although new regulatory and accounting developments are enhancing risk awareness and policyholder protection, this is not without cost. We expect to see further capital raising and consolidation, particularly in Kuwait and Saudi Arabia where regulators have introduced new laws leading to higher capital requirements.
Ratings | GCC Insurers’ Credit Quality Is Largely Stable
– Positive rating actions and outlook changes outpaced downgrades in 2021, spurred by a build up in earnings and capital. We anticipate
this trend will slow in 2022, given some earnings headwinds.
– Overall, we expect our ratings to remain broadly stable, but note that some negative rating actions could follow if we observe unexpected
severe investment or underwriting losses, or company-specific governance/internal control failures.
GCC Insurers Rating Distribution GCC Insurers Outlook Distribution
45% 80%
40% 70%
35%
60%
30%
50%
25%
40%
20%
30%
15%
10% 20%
5% 10%
0% 0%
AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- Stable Positive Negative CW Negative CW Developing
Feb. 2021 Feb. 2022 Feb. 2021 Feb. 2022
Data as of Feb. 22, 2022, Source: S&P Global Ratings. Data includes ratings of group subsidiaries. CW--CreditWatch. Data as of Feb. 22, 2022, Source: S&P Global Ratings. Data includes outlooks of group
subsidiaries.
3Capital Adequacy | Excellent For Almost All Rated GCC Insurers
GCC Insurers’ Capital Adequacy In Our Risk-Based Capital Model
120% – Last year, we estimate almost all our rated
insurers in the GCC maintained capital
100% adequacy at the ‘AAA’ confidence level in our
capital model, compared with about 84% in
2020.
80%
– However, the overall size of capital for GCC
insurers remains relatively small and can
60%
therefore quickly fluctuate.
– Overall, we estimate further capital build up
40%
in 2022, but at a slower pace than in previous
years when insurers benefited from stronger
20% earnings.
0%
AAA AA BBB or below
Year-end 2020 Year-end 2021e
e--Estimate. Source: S&P Global Ratings.
4ESG | Mainly Neutral But Governance Remains A Key Weakness
Distribution of ESG Credit Indicators – Environmental, social, and governance (ESG)
GCC insurers (%) factors are neutral to our credit rating
All EMEA insurers (%) analysis of 85% of GCC insurers.
Environmental Social Governance – In our view, GCC insurers face relatively
1 limited environmental risks. Physical risks
from natural catastrophes are relatively low
2 in the region and large risks are typically
E S G
ceded to international reinsurers.
3
– Social factors do not affect our ratings, as
4 insurers generally have established
processes to avoid potential mis-selling,
5 money-laundering, or privacy breaches that
0 50 100 0 50 100 0 50 100 could harm them.
– Overall, governance factors, such as
1 = positive | 2 = neutral | 3 = moderately negative | 4 = negative | 5 = very negative.
Our opinion of the influence of ESG factors on our credit rating analysis is reflected on a 1-5 scale.
weaknesses in risk management, culture,
EMEA--Europe, Middle East, and Africa. Source: S&P Global Ratings. and oversight, as well as transparency and
reporting, are moderately negative
considerations in our ratings on 15% of
insurers in the GCC and Europe, Middle East,
and Africa compared with 7% globally.
5Profitability | High Competition Will Mean Lower Earnings
Return On Equity For GCC Insurers Will Remain Volatile
16 – We forecast GCC insurers will remain
profitable in 2022, but ongoing intense
14
competition, particularly in motor lines, will
12 likely constrain technical results.
Return on equity (%)
– Overall, earnings in 2021 were supported by
10 well performing capital markets, resulting in
stronger investment returns. Increased
8
capital market volatility in 2022 could offset
6 higher interest rates and mean lower returns.
– We project profitability will only improve in
4 Saudi Arabia this year, where pressure on
underwriting is likely to ease. However, we
2
note that this comes from a low base and
0 project the sector’s profitability will remain
2019 2020 2021e 2022f relatively weak.
United Arab Emirates Saudi Arabia Qatar Kuwait Oman Bahrain
e--Estimate. f--Forecast. Source: S&P Global Ratings estimate.
6Economic Recovery | Spurred By Higher Hydrocarbon Prices
– Improving economic sentiment and higher oil and gas prices--we now assume an average Brent oil price of $85 for the remainder of 2022-
-should lead to accelerated economic growth in the region. We expect that insurers will likely benefit from ongoing infrastructure
spending, new mandatory coverage, and potentially higher insurance demand.
– That said, an uncontrolled resurgence of COVID-19 cases limiting mobility could slow the global and regional economic recovery.
Real GDP Growth Forecast 2020-2023
10 2020
8 2021e
6 2022f
Real GDP growth (%)
4 2023f
2
0
-2
-4
-6
-8
-10
United Arab Emirates Saudi Arabia Qatar Kuwait Bahrain Oman
e--Estimate. f--Forecast. Source: S&P Global Ratings.
7Key Risks In 2022 | Asset Risk and Intense Competition
Risk factor Description Impact on insurers
Asset Risk With a rapid increase in inflation, the U.S. Federal Reserve is set to hike interest rates in 2022. We expect this to prompt a
similar reaction from GCC central banks given their currency pegs with the U.S. dollar. In our view, this will mean insurers
benefit from higher returns on their cash and fixed deposits. However, higher interest rates could be offset by more volatile Moderate to high
capital markets. Although GCC insurers have limited direct exposure to Ukraine or Russia, in our view, an increase in market
volatility could have negative implications for those with significant exposure to equities or other high-risk assets.
Intense competition Motor and medical claims reached near pre-pandemic levels in most markets in 2021 as mobility increased. At the same
time, a decline in motor rates and an increase in claim costs, due to price increases for spare parts and services, amplified
Moderate to high
pressure on margins. Although inflation is expected to normalize in 2022, we believe that ongoing high competition,
particularly in motor lines, will continue to pressure earnings in 2022.
New regulations and Although new regulatory developments and the implementation of International Financial Reporting Standard (IFRS) 17 and
accounting standards IFRS9 accounting standards will continue to enhance risk awareness, policyholder protection, and transparency, it will come
at a cost. The need to update processes and information technology systems will likely lead to higher expenses in 2022.
Insurers with limited economies of scale may find it increasingly difficult to dilute their costs.
Moderate
Overall, we expect to see further capital raising and consolidation across GCC markets, particularly among smaller and
midsize players in Kuwait and Saudi Arabia where regulators have introduced new laws leading to higher capital
requirements.
Decline in reinsurance A further increase in reinsurance rates or difficulties to place certain facultative risks could create top- and bottom-line
Low
capacity challenges for some primary insurers.
Slowdown in premium We witnessed moderate premium growth in GCC insurance markets in 2021 and expect this trend to continue in 2022 as
growth economies recover. However, the uneven global recovery and issues around supply chains could affect premium income in Low
select lines and markets.Country-Specific Trends The UAE, Saudi Arabia, Kuwait, Qatar, Oman, and Bahrain
United Arab Emirates | Satisfactory Earnings Despite Competition
− The UAE's insurance market is the largest and among the most GWP Distribution In The UAE For 2018-2022f
profitable in the GCC. Weaker economic conditions led to a
decline in gross written premium (GWP) in 2020, particularly 14
due to lower premium income from motor and life/savings
business. With GWP growth picking up again thanks to higher 12
economic activity, we expect 2022 to exceed 2019 levels.
10
− More intense competition, resulting in lower motor rates, led to
a deterioration in technical results in 2021. As a result, we
GWP (bil. $)
estimate an increase in the market combined ratio (loss and 8
expense) to about 91% in 2021 from about 87% in 2020. We
anticipate the ratio will further weaken to about 92% in 2022, 6
as competition and rates pressure in certain lines remain high.
4
− Although rated UAE-based insurers are typically very well
capitalized, with substantial excess capital above
2
requirements, we note that at least 10% of listed players
operate below required minimum capital/solvency levels. We
0
expect to see stricter enforcement of regulations, which will
2018 2019 2020 2021e 2022f
increase pressure on smaller and weaker insurers.
P&C Insurance Medical Insurance Life and Savings Insurance
GWP--Gross written premium. P&C--Property and casualty. e--Estimate. f--Forecast. Sources: UAE
Insurance Authority, S&P Global Ratings estimate/forecast.
10Saudi Arabia | Intense Competition Pressures Underwriting Results
− The market maintained GWP growth of about 5% in 2021. We GWP Distribution In Saudi Arabia For 2018-2022f
expect this to remain in the same range for 2022, backed by the
kingdom’s expected economic recovery and further supported 12
by the Hajj and Umrah medical insurance program and other
new covers such as the inherent defects insurance scheme. 10
− Underwriting profitability remained under pressure in 2021 due
to the return of claim activity to pre-COVID-19 levels, coupled 8
with claims inflation. We expect 2022 will also be challenging
GWP (bil. $)
and require insurers to reassess their pricing strategy. We
expect only a modest recovery in underwriting performance 6
with the net combined ratio remaining at about 98%-99% in
2022. On a positive note, with interest rates expected to rise in 4
2022, investment income will likely improve and support overall
earnings.
2
− Following the increase in minimum capital requirements,
announced in 2021 with an implementation period of three
0
years, we expect further sector consolidation, as already seen
2018 2019 2020 2021e 2022f
in recent years.
P&C insurance Medical insurance Life and savings insurance
GWP--Gross written premium. P&C--Property and casualty. e--Estimate. f--Forecast. Sources: Saudi
Central Bank (SAMA), S&P Global Ratings estimate/forecast.
11Kuwait | New Regulations Will Accelerate Consolidation
− We expect GWP growth of 5% in 2021, supported by ongoing GWP In Kuwait For 2018-2022f
economic recovery and due to an increase in premiums from
2.5
the medical scheme for retirees (AFYA), which is written by only
one insurer.
− We forecast GWP will increase about 5% in 2022, supported by
2
ongoing economic recovery and a rising number of retirees,
increasing premium for the AFYA scheme. We anticipate that
government-sponsored infrastructure projects and higher
reinsurance rates will also support GWP growth. 1.5
GWP (bil. $)
− Like in previous years, we expect the overall combined ratio for
the market to remain at 95%-97% in 2022.
1
− Insurers in Kuwait tend to maintain lower capital buffers than
peers in other markets, which makes their credit quality more
sensitive. The new more-risk-based insurance law will likely
lead to some capital raising needs and consolidation among 0.5
smaller and midsize players.
0
2018 2019 2020 2021e 2022f
GWP Kuwait 2018-2022f GWP--Gross written premium. e--Estimate. f--Forecast. Sources: S&P Global Ratings. Breakdown by line
of business is not available.
12Qatar | Mandatory Medical Scheme Will Fuel Growth
− The Qatari government approved a compulsory health GWP In Qatar For 2018-2022f
insurance law, expected to take effect in May 2022. Under the
law, all foreign visitors, residents, and workers in the country 1.8
will have to hold medical insurance for the entire duration of
1.6
their stay, unless they are exempt. We estimate that the scheme
could generate Qatari riyal (QAR) 1 billion-QAR1.5 billion in 1.4
additional GWP in the coming years. We have not incorporated
this in our growth forecast for 2022, since no details about the 1.2
potential volume have been disclosed.
GWP (bil. $)
1
− In the meantime, we anticipate that higher public expenditure
to diversify the Qatari economy and further preparation for the 0.8
2022 FIFA World Cup will contribute to GWP growth in 2022.
− In 2021, we estimate combined ratios of 90%-92%, after just 0.6
under 90% in 2020. We then expect combined ratios to
0.4
converge closer to about 95%, potentially between 93%-96%,
as the proportion of medical business increases, which tends to 0.2
have lower profit margins.
0
2018 2019 2020 2021e 2022f
GWP—Gross written premium. e--Estimate. f--Forecast. Source: S&P Global Ratings. Breakdown by line
of business is not available. Data does not include GWP from Qatar Insurance Co.’s international business.
13Oman | More Normal Claims Levels Will Weigh On Earnings
− After a GWP decline of about 4% in 2020 due to weaker GWP Distribution In Oman For 2018-2022f
economic conditions, the market returned to growth of about
4% during the first nine months of 2021, backed by the 1.4
normalization of activity as well as implementation of 1.3
mandatory health insurance. We expect this trend to continue, 1.2
and the market will expand 3%-5% in 2022. 1.1
1.0
− Profitability significantly improved in 2020 thanks to fewer
0.9
claims because of lockdowns. It then declined in 2021 due to
GWP (bil. $)
more normalized claims activity. Looking ahead, we anticipate 0.8
the market will remain profitable but with underwriting 0.7
margins potentially still under pressure. With interest rates 0.6
expected to rise in 2022, investment income from cash deposits 0.5
is expected to improve and support overall earnings. 0.4
0.3
0.2
0.1
0.0
2018 2019 2020 2021e 2022f
P&C insurance Medical insurance Life and savings insurance
GWP--Gross written premium. P&C--Property and casualty. e--Estimate. f--Forecast. Source: Oman
Central Bank, S&P Global Ratings.
14Bahrain | Investment Income Is A Major Contributor To Net Earnings
− After an about 3.6% decline in GWP in 2020 due to weaker GWP Distribution In Bahrain For 2018-2022f
economic conditions, the market returned to growth of about
0.9
6.7% during first-half 2021. This came on the back of more
normal activity levels as well as strong growth in life, medical, 0.8
and property lines. Although motor lines remain under
pressure, with 2021 rates declining from 2020, we expect 0.7
overall GWP growth should remain at 3%-5% in 2022.
0.6
− With 36 licensed insurers, competition in the relatively small
GWP (bil. $)
market will remain high. Profitability improved in 2020, thanks 0.5
to fewer claims because of lockdowns, then declined in 2021
0.4
due more normalized levels of claims activity. We note that at
mid-year 2021, Bahraini insurers generated an underwriting 0.3
loss, while overall profitability was solely driven by investment
results. We anticipate the market will remain profitable, but 0.2
underwriting margins could still face pressure. With interest
0.1
rates expected to rise in 2022, investment income is expected
to improve and support overall earnings. 0
2018 2019 2020 2021e 2022f
P&C insurance Medical insurance Life and savings insurance
GWP--Gross written premium. P&C--Property and casualty. e--Estimate. f--Forecast. Sources: Bahrain
Central Bank, S&P Global Ratings estimate/forecast.
15Related Research
– Global Insurance Markets: Alive And Kicking, Dec. 7, 2021
– ESG Credit Indicator Report Card: EMEA Insurance, Nov. 29, 2021
– EMEA Insurance Outlook 2022 Sector: Fighting Fit For 2022, Nov. 16, 2021
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
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