After recording strong growth in 2022-2023, Islamic and Takaful insurers in the Gulf Cooperation Council (GCC) region continue to benefit from favorable growth prospects. Higher insurance demand in Saudi Arabia, the largest Islamic insurance market in the region, in addition to ongoing favorable economic conditions, has supported the sector’s 6-12 month outlook.
Sector to remain profitable
In addition, ongoing investments in infrastructure projects, population growth, and regulatory initiatives have bolstered GCC Islamic insurers’ growth. The latest report from S&P Global Ratings, however, says that increasing competition and declining investment returns could weigh on the industry’s earnings over the next 12-18 months.
S&P expects 2024 to be another profitable year for the GCC region’s Islamic and Takaful insurers sector. This comes following record net profits of $1 billion in 2023, mainly due to rate adjustments in previously underperforming lines and higher investment returns.
The Islamic insurance sector in the GCC region expanded substantially during the last five years. Topline growth was particularly strong in 2022-2023, when the sector rose by about 20-25 percent annually. This growth was mainly driven by the Saudi market, which expanded by about 27 percent in 2022 and another 23 percent in 2023.
Sector challenges remain
Competition will likely pick up in some GCC markets. Coupled with hopes of interest rate cuts starting in September and potentially more volatile capital markets, the sector could witness a sharp decline in earnings in 2025 if Islamic insurers fail to maintain their underwriting discipline.
“While we expect overall credit conditions for Islamic insurers will remain stable over the next 6-12 months, consolidation will likely remain a hot topic among smaller and midsize players,” the report added. Notably, close to 20 percent of Islamic insurers in Saudi Arabia and about one-third in the UAE merged in recent years.
Growth outside of Saudi Arabia
In 2023, Islamic insurers’ topline in GCC countries outside of Saudi Arabia cumulatively declined by around 3 percent. S&P attributes this dip to a decline in premium income in the UAE, the region’s second-largest Takaful market, primarily due to consolidation in the industry and rate pressure affecting motor and other lines.
However, the report expects the Takaful sector in the UAE to expand by 15-20 percent in 2024 as motor rates increased substantially over the past 12 months, particularly following this year’s heavy rainfall in Dubai and other parts of the UAE. In addition, Takaful players in Bahrain, Kuwait, Oman, and Qatar will report more moderate growth rates of about 5-10 percent.
Read: UAE nationals receive $691.53 million in home construction tax refunds from FTA
Future outlook
Apart from a few positive outliers, S&P’s credit ratings for GCC Islamic insurers remained broadly stable over the past 18 months. The rating agency does not expect any major rating action in the next 6-12 months since most insurers have sufficiently capitalized. “Total shareholders’ equity in the sector increased to about $7.6 billion in 2023, from $6.6 billion in 2022, thanks to profitable earnings and several capital increases,” S&P added.
However, the sector still faces some risks to its credit conditions, including the escalation of geopolitical tensions in the region and the increase in competition, which could impact investment returns and impair earnings and capital buffers.
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