[email protected] robust capital supports credit
TRANSCRIPT
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 Rating Distribution GCC Insurers Outlook Distribution
GCC Insurers | Credit Quality Is Largely Stable
0%
5%
10%
15%
20%
25%
30%
35%
AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B-
Feb. 2020 Feb. 2021
3
0%
10%
20%
30%
40%
50%
60%
70%
80%
Stable Negative Positive CW Neg. CW Dev.
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.
– 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.
Capital Adequacy | A Key Rating Strength
84%
6%
10%AAA
AA
BBB or below
4
– About 84% of insurers in the GCC maintain capital adequacy above the ‘AAA’ confidence level in our capital model, compared with 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.
Source: S&P Global Ratings.
GCC Insurers’ Capital Adequacy In Our Risk-Based Capital Model
Industry And Country Risk | Country Risk Remains Relatively High
0%
10%
20%
30%
40%
50%
60%
Very low risk Low risk Intermediaterisk
Moderatelyhigh risk
High risk Very high risk
5
– Economic and/or political risks remain moderately high in Kuwait and Saudi Arabia, and high in Bahrain and Oman.
– Insurance markets in the GCC typically benefit from low product risks and satisfactory growth and earnings prospects.
– Key risks usually relate to potential volatility of earnings and capital stemming from exposure to high-risk assets and intense competition.
– We also note that most insurance markets in the region are overcrowded and concentrated, with the top five insurers generating more than 60% of overall profits and GWP.
The latest details of our IICRAs can be found in "Insurance Industry And Country Risk Assessment Update: November 2020," published Nov. 17, 2020.
Insurance Industry And Country Risk Assessments (IICRAs) In GCC
UAEQatarSaudi ArabiaKuwait
BahrainOman
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 couldweaken credit conditions for insurers in 2021, particularly if central banks gradually lift forbearance measures later this year.
High
Increase in receivables and write offs
We expect premium collections to remain slow as many businesses delay their payments in an attempt to survive. This will likely lead to an increase in receivables and write offs, putting further stress on liquidity, asset quality, and consequently credit conditions for insurers, in our view.
Moderate
Weaker underwriting results
Despite fewer claims in 2020, due to movement restrictions and pandemic-related claims not being covered under most 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 (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.
Low to moderate
Decline in reinsurance capacity
Low reinsurance capacity in the region has led to strong rate increases and we expect this will continue in 2021. Although this will benefit reinsurers' top line and earnings, it could squeeze primary insurers' underwriting margins further. A potential shift to lower-rated or unrated reinsurers in search of lower rates could also increase credit risk.
Low to moderate
Slowdown in premium growth
Weaker economic activity has stoked competition, particularly in motor and medical lines, which together make up more 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 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.
Low to moderate
Sovereign risk Weakening economic conditions and sovereigns' credit quality could further constrain insurers’ creditworthiness in countries with relatively lower sovereign ratings, such as Bahrain and Oman. Low
Key Risks In 2021 | Asset Risk Remains On Top
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 and digital distribution
The pandemic has accelerated the development of digital sales and claims processing in the GCC. More 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.
Opportunities | Greater Awareness Could Fuel Demand
Real GDP Growth Forecast 2020-2023
Economic Growth | GCC Insurers Still Stand To Benefit
-10
-8
-6
-4
-2
0
2
4
6
8
United Arab Emirates Saudi Arabia Qatar Kuwait Bahrain Oman
Rea
l GD
P g
row
th (%
)
2020e
2021f
2022f
2023f
8
e--Estimate. f--Forecast. Source: S&P Global Ratings.
– 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.
Country-Specific Trends
UAE, Saudi Arabia, Kuwait, Qatar, Oman, and Bahrain
GWP Distribution UAE 2018-2021
United Arab Emirates | Market Will Likely Remain Highly Profitable
– The UAE's insurance market remains the largest and one of the most profitable in the GCC. However, amid weaker economic conditions, GWP growth has been relatively flat. We estimate an overall GWP decline of almost 2% in 2020, particularly due to lower premium income from motor and life/savings business.
– While there could be some rate increases for motor policies in the second part of the year and for certain reinsurance lines, GWP growth will likely remain relatively flat in 2021, due to economic uncertainty and a decline in the expat population in Dubai and other emirates in 2020-2021.
– 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 investment returns remain subdued. Overall, we anticipate the combined (loss and expense) ratio weakening to about 92% in 2021 from about 90% in 2020.
– Regulatory oversight will likely strengthen, thanks to the merger of the insurance authority and central bank, which could lead to stricter enforcement of regulations, increasing pressure on smaller and weaker insurers.
10
0
2
4
6
8
10
12
14
2021f2020e20192018
GW
P in
US
D (b
il.)
P&C Insurance Medical insurance Life and savings insurance
e--Estimate. f--Forecast. Sources: UAE Insurance Authority, S&P Global Ratings estimate/forecast.
GWP Distribution Saudi Arabia 2018-2021
Saudi Arabia | Regulatory Initiatives Will Continue To Fuel Growth
– New mandatory medical coverage has supported GWP growth in recent years. We estimate that overall GWP increased by 3%-5% in 2020, thanks to higher motor and reinsurance rates.
– We forecast GWP growth of up to 5% in 2021, supported by the Hajj and Umrah Medial Insurance Program, the Inherent Defects Insurance Scheme, and higher motor insurance penetration. We also foresee some rate increases in medical insurance this year after a decline in GWP in 2020, since public hospitals will likely start billing insurers for their services.
– Overall, we forecast a modest decline in profitability in 2021, 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.
– Following recent merger news, consolidation will likely continue this year, given that roughly one-third of the 30 active primary insurers are still making losses. This could accelerate if, as anticipated, the regulator sets higher minimum capital requirements, requiring companies to raise additional capital.
11
0
2
4
6
8
10
12
14
2021f2020e20192018
GW
P in
US
D (b
il.)
P&C insurance Medical insurance Life and savings insurance
e--Estimate. f--Forecast. Sources: Saudi Central Bank (SAMA), S&P Global Ratings estimate/forecast.
GWP Kuwait 2018-2021
Kuwait | New Stricter Regulations Could Accelerate M&A
– Insurers in Kuwait tend to maintain lower capital buffers than peers in other markets, which makes their credit quality more sensitive to fluctuations in capital and earnings and a weak economy. Anticipated new and tougher regulations could lead to some capital raising and consolidation in 2021.
– We estimate that the insurance market expanded by about 5% in 2020 mainly due to an increase in premiums from the medical scheme for retirees (AFYA), which is written by only one insurer.
– We expect GWP growth of about 5% in 2021, as the number of retirees increases, leading to higher GWP in the AFYA scheme. We anticipate that government-sponsored infrastructure projects and higher reinsurance rates will also support GWP growth.
– As in other markets, a decline in motor and medical claims led to stronger underwriting results in 2020. We expect the overall combined ratio for the market to settle at 95%-97% in 2021.
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0
0.2
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0.6
0.8
1
1.2
1.4
1.6
2021f2020e20192018
GW
P in
US
D (b
il.)
e--Estimate. f--Forecast. Sources: S&P Global Ratings. Breakdown by line of business is not available.
GWP Qatar 2018-2021
Qatar | Lifting Of Boycott Could Be Positive For Insurers
– In 2020, market growth in Qatar was fueled by rate increases for large medical accounts and higher reinsurance rates, resulting in GWP growth of about 5%.
– 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 between Qatar and Saudi Arabia, as well as with other countries that severed relations with Qatar, including Bahrain, Egypt, and the UAE.
– Qatari insurers are likely to benefit from increased regional 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.
– 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 improved in recent years.
13
0
0.5
1
1.5
2
2021f2020e20192018
GW
P in
US
D (b
il.)
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.
GWP Oman 2018-2021
Oman | More Normal Claims Levels Will Weigh On Earnings
– Weaker economic conditions and an estimated decline in the expat population of about 12% (close to 230,000 people) led to a decline in GWP by 4%-5% in 2020.
– Although Oman is planning to implement a new compulsory health insurance scheme that should boost GWP in the coming years, we forecast a further modest decline in GWP in 2021.
– We expect the market to report a significant improvement in profitability of about 50% in 2020 versus 2019, thanks to fewer claims because of strict COVID-19-related lockdowns.
– In 2021, profitability will likely decline due a more normalized level of claims and potential volatility on the asset side. The government will introduce a value-added tax of 5% from April 2021, which could create additional one-off costs for insurers. Nevertheless, we anticipate the market will report a combined ratio of 92%-95% in 2021.
14
0
0.2
0.4
0.6
0.8
1
1.2
1.4
2021f2020e20192018
GW
P in
US
D (b
il.)
e--Estimate. f--Forecast. Source: Oman Central Bank, S&P Global Ratings.
GWP Bahrain 2018-2021
Bahrain | Competition Will Remain High In The Absence Of Growth
15
e--Estimate. f--Forecast. Sources: Bahrain Central Bank, S&P Global Ratings estimate/forecast.
– We expect that overall GWP declined in 2020 due to lower economic activity, tourism from Saudi Arabia and other countries in the region, and sales of new cars affecting premium income in motor and other lines.
– In our view, GWP growth in 2021 could be flat at best because of ongoing weaker economic conditions. However, a potential introduction of a mandatory medical scheme could support GWP growth in the coming years.
– 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 combined ratio to be in the 95%‐97% range in 2020-2021.
0
0.2
0.4
0.6
0.8
1
2021f2020e20192018
GW
P in
US
E (b
il.)
Related 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
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Analytical Contacts
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Liesl Saldanha [email protected]
Emir Mujkic [email protected]
Sachin [email protected]
Mario [email protected]
Varun [email protected]
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