Islamic insurers' strong profitability might not continue throughout 2021, says S&P report
A new report from S&P Global Ratings says that unlike in the corporate sector, where the pandemic led to widespread downgrades in 2020, credit ratings on Islamic (Takaful) and conventional insurers in the Gulf Cooperative Council (GCC) have remained broadly stable over the past 18 months, supported by relatively strong capital buffers.
Indeed, S&P has taken several positive rating actions on Takaful companies so far this year, and its outlook on the sector for the next 12 months remains stable. However, given that risks related to the pandemic persist, S&P says it could take rating actions in the event of a sharp decline in asset prices, unexpected and severe technical losses, or governance and internal control failures.
S&P expects an economic recovery in the GCC in 2021, supported mainly by the increase in oil prices and the vaccine rollout. However, slow vaccination progress in some parts of the world and new variants could dampen the recovery.
"An uneven recovery, ongoing cost-saving measures in many industries, and a shift to less business travel has further increased the pressure in key sectors such as real estate, retail, transportation, and hospitality," says S&P Global Ratings credit analyst Emir Mujkic.
"We believe these factors, combined with very intense competition in the insurance sector, are weighing on growth prospects for gross written premiums/contributions of both Takaful and conventional insurers," Mujkic adds.
Very high competition in the overcrowded GCC insurance industry will continue to weigh on earnings in 2021. Despite a recent material improvement in profitability in Saudi Arabia's insurance sector, more than one-third of insurers continue to report losses. A new insurance law with higher reserving requirements due to come into force over the next year, could also increase pressure on small and unprofitable takaful players in Kuwait that will need to raise capital to meet these requirements. "Overall, while we expect growth in the sector, we think it'll be unevenly spread, with larger conventional insurers taking more of the gains than the takaful," Mujkic says.