Moody's: Stronger underwriting profitability for Islamic insurers a credit positive
Regulatory changes in some Gulf Cooperation Council (GCC) countries have pushed up insurance prices, particularly for motor and medical cover, improving the underwriting profitability of the region's insurers, says Moody's Investors Service in a recent report.
This includes the region's Shari'ah compliant insurers ('Takaful' whether Cooperative or Takaful), many of which have in recent years made underwriting losses despite double-digit premium growth.
Moody's report, Insurance–Gulf Cooperation Council Countries: Islamic insurers' stronger underwriting profitability is credit positive," is an update to the markets and does not constitute a rating action.
"The GCC Takaful insurance sector's improved performance will help it halt capital erosion, attract investor interest, and refocus on its most lucrative markets. Despite double digit growth in prior years, GCC Takaful insurers' underwriting profitability has been weak to negative in recent years–combined ratios for the region have been close to or above the 100 per cent break-even point,” said Mohammed Ali Londe, Assistant Vice President–Analyst at Moody's.
The improved profitability of GCC Takaful insurers reflects an increase in prices triggered by regulatory changes, such as the introduction of actuarial reserving in Saudi Arabia and the United Arab Emirates.
In Saudi Arabia, actuarial reserving and pricing contributed to a decline in the overall loss ratio to 77 per cent in 2016 from 79 per cent in 2015, and reducing further to 76 per cent for the first nine months of 2017. In UAE, Takaful operators' loss ratio fell to 63 per cent for the same time period from 89 per cent and 79 per cent at year-ends 2016 and 2015, respectively.
Moody's said that the improvement in profitability will likely attract fresh interest in the GCC Takaful sector from both existing shareholders and new investors. This would allow Takaful operators to replenish their capital as well as improve their financial flexibility, equipping them if necessary to participate in market consolidation.
Furthermore, improved profitability from medical and motor insurance will allow Takaful insurers to focus on these markets, cutting back on costly expansion into other product lines. Previously, the insurers' persistently weak underwriting performance put them under pressure to expand their product offering, incurring extra costs as a result.