Saudi Arabia poised to ignite Islamic insurance boom in GCC: report

RIYADH: Saudi Arabia is poised to lead the expansion of Islamic insurance in the Gulf Cooperation Council, with revenues expected to exceed $20 billion in 2024, according to S&P Global. The sector is projected to grow by 15 to 20 percent next year, with the Kingdom playing a crucial role.

This follows S&P Global’s report indicating that Saudi Arabia’s insurance market experienced significant growth of 27 percent in 2022 and 23 percent in 2023, enhancing the overall performance of the region.

“We expect the Saudi market, similar to the past two years, will be the main driver of topline growth in the GCC region. This is because Saudi Arabia, the GCC region’s largest Islamic insurance market, continues to benefit from higher economic growth,” said the US-based credit rating agency.  

The report highlights that Saudi authorities are actively working to reduce the number of uninsured vehicles and introduce new mandatory medical cover, which is anticipated to further drive insurance demand and increase premium income.

A separate analysis by UK-based consultancy GlobalData projected that Saudi Arabia’s insurance industry will grow at a compound annual rate of 5.2 percent through 2028, reaching $22.3 billion. This growth, from $18.19 billion in 2024, is largely attributed to the health and motor segments, which are expected to constitute 86 percent of total gross written premiums.

In contrast, S&P Global’s report notes a decline of nearly 3 percent in the Islamic insurance market outside Saudi Arabia in 2023. This decrease was primarily due to a reduction in premium income in the UAE, the region’s second-largest Takaful market, driven by industry consolidation and rate pressures in motor and other lines.

Takaful is a form of Islamic insurance where participants pool their contributions to provide mutual protection against loss or damage, offering coverage for health, life, and general insurance requirements. 

“We expect the Takaful sector in the UAE will expand by 15 percent to 20 percent in 2024 as motor rates increased substantially over the past 12 months, particularly following this year’s major floods in Dubai and other parts of the UAE,” said the US-based agency.  

The report added: “At the same time, we anticipate that Takaful players in Bahrain, Kuwait, Oman, and Qatar will report more moderate growth rates of about five percent to 10 percent.”  

Stable outlook 

S&P Global noted that credit ratings for insurers in the GCC have remained broadly stable over the past 18 months. The report stated: “We do not expect any major rating actions over the next six to 12 months, as most rated insurers are 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.”

However, the report cautioned that geopolitical tensions in the region and increased competition could negatively impact the prospects for both Islamic and conventional insurance providers. It highlighted that a regional escalation of the Israel-Hamas war would be economically, socially, and politically destabilizing for the entire GCC region and its banking systems.

According to the analysis, a regional escalation combined with slow global economic growth could impair revenue growth and increase investment volatility for GCC Islamic and conventional insurers alike.

“While we expect overall credit conditions for Islamic insurers will remain stable over the next 6-12 months, consolidation will likely remain relevant as many smaller and midsize Islamic insurers continue to report relatively weak earnings,” said the report. It added, “Even though we expect that the effects of the Israel–Hamas war will remain contained to the region, we note that the risk of regional escalation is increasing. Although this is not our base case, a regional escalation could impair business sentiment in the wider Middle East, including the GCC region, reduce growth prospects, and impair GCC insurers’ investment portfolios.”

Mergers and consolidation 

The report highlighted that increased competition and rising regulatory demands have already led to several mergers in the GCC insurance sector, with more expected in the future.

Consolidation is particularly notable among smaller and midsize players in Saudi Arabia and the UAE. Over the past five to six years, the number of listed Saudi insurers has decreased by about 20 percent, from 34 to 27.

S&P Global noted that mergers are likely to continue in Saudi Arabia, the UAE, and Kuwait, as several Islamic insurers still do not meet the required solvency capital standards.

In July, Buruj Cooperative Insurance Co. and Mediterranean and Gulf Insurance and Reinsurance Co., known as MedGulf, signed a memorandum of understanding to explore a potential merger. The companies announced to the Saudi Exchange that the MoU aims to establish a framework for the strategic transaction through a share exchange offer.

The deal will involve increasing MedGulf’s capital and issuing new shares to Buruj shareholders, based on an exchange ratio to be agreed upon by both parties. If the transaction proceeds as planned, MedGulf will be the acquiring company, while Buruj will be the acquired firm.

2024 outlook

The US-based firm noted that results from the first half of 2024 suggest further improvement in net profits, following record results for GCC Islamic insurers in 2023.

The sector’s aggregate net profit in the region rose to approximately $967 million in 2023, up from about $100 million in 2022. 

“This improvement was mainly driven by the Saudi market, whose underwriting results improved and investment income increased to about $690 million in 2023, from about $345 million in 2022, substantially contributing to overall earnings,” noted S&P Global.  

The report further noted that, for the first time, all 25 of Saudi Arabia’s listed insurers reported a net profit in 2023. This follows a challenging 2021 and 2022, when more than half of the Kingdom’s insurers reported a net loss. 

“The five largest of the 25 listed insurers in Saudi Arabia generated about 73 percent of total insurance revenues in 2023, up from 69 percent in 2022. Saudi Arabia’s largest insurers, the Company for Cooperative Insurance and Bupa, had a combined market share of about 55 percent in 2023,” added S&P Global.  

Although the Saudi market reported an increase in net earnings to about $588 million in the first half of 2024, up from approximately $450 million in the same period of 2023, 14 out of 25 listed insurers in the Kingdom experienced a decline in underwriting results and profits by mid-2024. This suggests a rise in competition.