GCC insurers' gross premiums will grow, 2017 profitability may be volatile
S&P Global Ratings expects that credit conditions for the insurers it rates in the four largest Gulf Cooperation Council (GCC) markets by gross premiums-- Saudi Arabia, the United Arab Emirates (UAE), Qatar, and Kuwait--will remain broadly stable in 2017.
This is despite the current economic slowdown in the GCC region, which is the result of relatively low oil and gas prices, as these contribute heavily to government budgets.
S&P forecast that gross premiums in the four largest GCC insurance markets will continue to increase in 2017, by around 30 per cent in Kuwait, and by up to 10 per cent in the other three markets. Further growth assumptions are based on the planned privatisation of medical insurance schemes and ongoing government spending on infrastructure projects, which will lead to a larger number of insurable risks. This means that premium growth is likely to exceed expectations for real GDP growth in the four largest GCC insurance markets in 2017, and should range between 1.5 per cent for Kuwait and about 3.5 per cent for Qatar.
span style="font-family: Calibri; font-size: small;">Overview
· Although the GCC region is far from uniform in terms of insurance developments, new regulations and types of insurance cover, as well as government infrastructure spending, are likely to contribute positively to premium growth in the four largest insurance markets in the GCC in 2017.
· These contributors to positive premium growth may also lead to some volatility in profitability, as insurers may lack sufficient data to price the new business appropriately.
· The gap between large and small companies in the overcrowded and concentrated GCC insurance markets will continue to widen due to fierce competition.
· The first steps toward market consolidation in 2017 are likely to be taken, although transformative mergers are unlikely.
The four largest insurance markets in the GCC are likely to remain profitable in 2017. However, there is a risk that, in addition to further reserving requirements following the adoption of new regulations in the UAE, the enforcement of mandatory insurance cover in Saudi Arabia, and the privatisation of medical insurance in Qatar and Kuwait, could strain insurers' technical performance, as they lack sufficient data to price the new business appropriately. Some potential risks to profitability in the short term could be seen.
Fierce competition will continue to increase the gap between large and small insurers, as greater size helps insurers to mitigate high fixed costs and increase their competitiveness. For example, in markets where actuarial pricing is mandated, smaller players may be forced to ask for higher rates than their larger competitors, due to additional expense loading. Actuarial pricing means that rates must be calculated by actuaries based on loss and expense expectations, so as to deliver an underwriting profit in normal circumstances. According to S&P, with the help of regulators, this widening gap could prompt the start of industry consolidation over the next one or two years.
Therefore the key factors likely to affect GCC insurers' creditworthiness in 2017 and 2018 are likely to be uncertainty over profitability, as new regulations and types of insurance cover are introduced, growing imbalances between large and small insurers, and the start of industry consolidation in Saudi Arabia, and to a lesser extent, the UAE.
How new regulations and types of insurance cover will affect technical profitability in the four largest GCC Insurance Markets
Insurance markets in the GCC are at different stages of maturity and regulatory development. While risk-based regulations, including actuarial pricing, were introduced in Saudi Arabia a few years ago, the UAE market will be formally required to fully implement new risk-based regulations by the end of 2017. The Central Bank of Qatar released a new draft law in 2016, but insurers in Qatar will likely only have to fully adopt these new regulations in two-to-three years' time. Kuwait is the only market lagging behind, and a draft of risk-based regulations is yet to be seen.
The benefits of actuarial pricing became apparent in 2016, when net income in the Saudi Arabian non-life sector improved significantly, to $667 million up from $267 million in 2015. The 29 listed, national insurers in the UAE achieved a net profit of $241 million, compared to a net loss of $33.5 million in 2015. Markets in Qatar and Kuwait are expected to remain profitable, but slightly less so than in previous years, due to mounting competitive pressure in the absence of risk-based regulations and actuarial pricing that could improve underwriting discipline. There are a number of growth opportunities in the four largest GCC insurance markets. However, they could pose a threat to insurers' profitability and capital.
span style="font-family: Calibri; font-size: small;">Saudi Arabia
Premium growth opportunities:
· 55 per cent of all vehicles in Saudi Arabia are currently uninsured and need to obtain proper insurance cover;
· The employers of around 2.5 million uninsured Saudi nationals working in the private sector are required by law to provide group medical cover;
· About 870,000 uninsured foreign workers and their dependents are required by law to obtain medical insurance; and
· "At fault" motorists are obliged to pay the medical costs of their road accident victims, as the Ministry of Health has proposed. This could significantly increase motor insurance rates.
The insurance sector in Saudi Arabia is likely to report the lowest premium growth of all GCC insurance markets in 2017, as both rate increases and volumes in the Kingdom stabilise after years of rapid expansion. However, if all the opportunities mentioned materialise, this could bring more than $3 billion of additional premium income to the Saudi Arabian insurance market, translating into 30 per cent premium growth over the next two years. At the same time, we see a risk that Saudi Arabian insurers may misprice rates for these new policies, at least initially, due to a lack of available claims data. This could then lead to technical losses.
Although aggregate shareholders' equity in this market increased by about 17 per cent to $3.7 billion in 2016 from $3.1 billion in 2015, a large number of Saudi Arabian insurers still have relatively weak capital buffers. It is understood that some insurers are raising capital through rights issuances, which should improve the market's overall capitalisation.
However, there is a risk that the market capitalisation may not be strong enough to cope with a strong increase in risk exposure and associated technical reserving requirements if all the above mentioned opportunities materialise in 2017 and 2018.
span style="font-family: Calibri; font-size: small;">UAE
Premium growth opportunities
· Formal adoption of new insurance regulations, including risk-based actuarial pricing, in 2017;
· Introduction of a new unified motor insurance policy by the Emirates Insurance Authority from Jan. 1, 2017, which provides additional benefits to policyholders and sets minimum rates; and
Premium growth from the Dubai Health Scheme.
We expect that the expansion of the Dubai Health Scheme and the implementation of a new unified motor insurance policy will continue to contribute to UAE insurers' earnings. In contrast, while we expect that the formal adoption of actuarial pricing is likely to lead to rates increases across the board, the introduction of new risk-based regulations also creates operational uncertainty.
UAE insurers will move to calculating regulatory capital in accordance with risk-based requirements, rather than at the previous simple absolute capital minimum. Therefore, the key risk for the UAE insurance market is regulatory intervention if companies do not fully comply with the new risk-based solvency regulations by the end of this year. At least 10 per cent of the authorised insurers in the UAE may be required to raise additional capital over time if they want to continue to operate in the market.
UAE insurers will also be required to calculate their regulatory reserving requirements based on actuarial guidelines. As a result, a number of insurers had to increase their technical reserves in 2016, and it is likely that certain insurers may need to increase their reserving levels further in 2017. This could weaken these insurers' profitability, depending on the scale of the additional reserving requirements.
In the short term, it is likiely that the cost of regulatory compliance in the UAE will rise, as insurers will need to add expertise and improve their systems to meet the new regulatory demands. Smaller and less-well-capitalised insurers will probably find the new regulations particularly challenging. Larger companies, and those with strong existing internal reporting, systems, and controls, should be able to cope more easily with the additional demands.
The introduction of a new unified motor policy–which provides enhanced third-party liability cover and additional rental car benefits–as positive for both insurers and policyholders. The new policy sets minimum rates for each vehicle class to limit market price wars and maximum rates and so ensure policyholder protection. This new policy has already led to rate increases of around 20 per cent over the past three months, and it is understood that the Emirates Insurance Authority is reviewing the policy to assess if the set limits are in line with actuarial requirements.
Although there may be some downward adjustment to the minimum limits, we do not expect that this would have a material impact on the improved profitability of this line of business.
The Dubai Health Scheme entered its third and final implementation stage in 2016, when the remaining uninsured residents–about 40 per cent of roughly 3.8 million residents in total–had to obtain medical insurance cover, initially by year-end 2016, but now by 31 March 2017. It is anticipated that there will be a further material premium growth in 2017, since a large number of these policies were written in the last quarter of 2016, for which premiums will be earned in 2017, and a number of new policies will be written in the first three months of 2017.
Medical business from this scheme–particularly from the basic cover for residents with a monthly income of less than $1,089–was highly profitable in 2016, with loss ratios below 60 per cent. However, S&P expects that profitability may deteriorate slightly in 2017, as premium growth settles down and the number of claims increases as policyholders become more familiar with the benefits of this cover. It is also likely that there will be some pressure on rates for this cover, as the number of authorised insurers that the regulator has approved to participate in the scheme increased to 12 in 2017 from only nine in 2016 and these factors could lead to lower profit margins or even technical losses in the medium term for medical business, if claims ratios increase materially and rates remain competitive.
span style="font-family: Calibri; font-size: small;">Qatar
Premium growth opportunities
· Privatisation of medical insurance, starting with about 300,000 Qatari nationals in 2017, followed by an expected 2.2 million of additional expatriates in 2018; and
· Ongoing infrastructure spending on projects relating to the 2022 FIFA World Cup.
Following the suspension of the nationally administered health programme, SEHA, in 2015, the Qatari government is transferring medical protection for nationals to the private sector through a compulsory insurance scheme, with premiums to be largely paid by employers. The first wave, covering about 300,000 Qatari nationals, is due to be introduced in 2017, although uncertainty remains around timing, coverage, and pricing.
The total scheme could lead to an additional $1 billion or more in gross premiums for insurance companies operating in Qatar. However, there is a risk that insurers may misprice this new business, at least initially, due to a lack of available claims data, which could lead to technical losses.
The insurers rated in Qatar are well capitalised, and should therefore be able to absorb the expected material premium growth. The increase in risk exposure could weaken Qatari insurers' capital strength.
However, it is unlikely that they will need to raise additional capital in the short to medium term, as they should be able to offset any losses through income from generally profitable government-sponsored infrastructure business.
span style="font-family: Calibri; font-size: small;">Kuwait
Premium growth opportunities
· privatisation of medical insurance for the approximately 2.9 million expatriates in Kuwait; and
· Introduction of mandatory medical insurance for the approximately 107,000 retirees.
In the second half of 2016, the Kuwait Ministry of Health's medical law for retirees came into effect. It is expected to generate about $271 million in gross premiums written from approximately 107,000 retirees. This large scheme will lead to significant premium growth in 2017 as a result of the new business written.
However, because this is a new line of business, and one awarded on the basis of competitive tenders, technical performance remains uncertain. Some threats to Kuwaiti insurers' profitability are likely to be seen in the short term. The large, listed insurers in Kuwait are generally well-capitalised, which means that they should be able to absorb the expected premium growth.
Overcrowding aggravates imbalances in premiums and profits, even in profitable markets…
Non-life insurance markets in the GCC are expected to remain highly competitive in 2017. Large and more diversified insurers enjoy a competitive advantage, leading to material premium and profit imbalances in these markets. For example, the three largest players by gross premium income in Saudi Arabia generated about 54 per cent of the total gross premiums and 55 per cent of net profits in the market in 2016. The UAE market is even more concentrated in terms of profits, as the largest three of the 29 listed insurers generated 46 per cent of the total market premiums and 68 per cent of total profits in 2016.
In Qatar, the six largest local insurers have joined together to form a consortium that has preferential access to government-sponsored infrastructure risks relating to the 2022 FIFA World Cup. These six companies already share more than 85 per cent of total gross premiums and profits in the country, and their preferential access to profitable government-related business will likely increase this share further. The remaining premiums that the consortium does not share are largely generated from motor insurance business, which is significantly less profitable due to the higher level of competition.
Larger insurers often enjoy compelling economies of scale. For example, some hospitals in Saudi Arabia offer discounts of up to 50 per cent to medical insurers that direct large numbers of patients to them. These discounts and other economies enable large insurers to profitably undercut their smaller rivals, while smaller insurers have to find their niche in the highly competitive markets in the GCC.
...A move toward consolidation could be the solution
S&P remains of the opinion that there are too many insurance companies in the GCC, and that many of these players lack the scale to operate successfully in overcrowded and highly competitive markets. Only insurers with the capital strength and time to build scale and develop an effective competitive advantage are likely to continue to prosper.
The introduction of more rigorous regulations and greater cost pressure will likely force a gradual move toward consolidation in the insurance industry. Consequently, it is likely that 2017 could see some long-awaited consolidation, particularly in Saudi Arabia, and to a lesser extent in the UAE, in a bid to reduce the number of small and loss-making insurers.
However, the complexity and occasional ambiguity of local law and regulations mean that economic logic alone may not be sufficient to support consolidation. It is therefore likely that governments, through insurance regulators, will agree to act as facilitators. The regulator in Saudi Arabia, SAMA, has taken on this role in the past, successfully promoting the consolidation of the domestic banking sector to just 12 banks. The Saudi Arabian insurance market will probably act as a front runner when it comes to consolidation, as the first public announcement of merger discussions between two relatively small Saudi Arabia-based insurers–Al Ahlia Cooperative Insurance and Gulf Union Cooperative Insurance—was made in early March 2017.
While the prospects of mergers are viewed as positive from a market perspective, consolidation brings about execution risk. In the absence of any meaningful mergers, in terms of number and size, in the GCC insurance market in recent years, there is a risk that acquiring companies may lack the experience and expertise to successfully integrate the acquired company.