GCC insurance markets brace for competitive pressures

The growth of the insurance markets within the countries of the Gulf Cooperation Council (GCC) will continue, albeit at a reduced pace, as economic growth remains relatively modest in 2013, according to a new report from A.M. Best Co.

The report, titled “GCC Insurance Markets Brace for Competitive and Profitability Pressures”, states that all of the GCC countries—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates—experienced increases in gross premium written (GPW) in 2012. Although total GPW for the six GCC countries reached USD 16.3 billion in 2012, depressed world financial markets have significantly dampened the region’s economic growth. Total premium rose by a relatively modest 10.4% in 2012, a material slowdown since 2008 when total premium grew by 25%, with compulsory medical schemes and the expansion of motor business being the most significant drivers in recent years.

In the past few years, the GCC operating environment has remained sound despite regional political instability, and consequently, has continued to attract capital. A.M. Best-rated GCC insurers have been resilient in terms of operating performances, despite the more subdued underwriting activity and investment markets.
Following the unrest, there has been a material tightening of policy wordings in the region, while the stress caused by the financial crisis had depressed real estate and equities markets, upon which some insurers were previously dependent for income. While real estate values are rebounding, the investment mix remains aggressive and investment performance is volatile.

Mahesh Mistry, director, analytics, said: “Most GCC insurers and reinsurers tend to be well capitalised and able to absorb riskier investment profiles. While there is a high degree of prudence and stability on underwriting activities, investment strategies have tended to be aggressive. This subsequently leads to volatility, not just in a company’s earnings performance, but also in its level of risk-adjusted capitalisation as market values fluctuate”.

The report also considers the competitive environment for both conventional and Takaful insurers, finding that one of the most significant challenges for the Takaful sector is the ability to grow profitability and differentiate itself in an increasingly competitive operating environment.

Most Takaful and ReTakaful market participants are new entrants that find it difficult to establish themselves and create a balance between market franchise and profitability. Rather than distinguish themselves through targeting new untapped segments of the market, Takaful and ReTakaful operators tend to compete directly with their conventional counterparts, some of whom benefit from a strong reputation and economies of scale.

Vasilis Katsipis, general manager, market development – MENA, South & Central Asia, added: “Despite the challenges facing the Takaful sector, A.M. Best expects the market to continue to present opportunities and grow at a faster rate than the conventional insurance market over the short-to-medium term.

“As the Takaful market has evolved in recent years, the level of regulation governing this niche market has developed, which is encouraging, with some regulators having introduced or considering the introduction of specific rules that cater to the Takaful market and its unique characteristics”.

A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.