Stricter capital rules to drive consolidation among GCC Islamic insurers

Plans to increase minimum capital requirements may drive consolidation in the Gulf Cooperation Council’s (GCC) Islamic insurance industry, S&P Global Ratings said in a recent report.

“Thanks to strong premium growth in Saudi Arabia and other GCC markets, Islamic insurers in the region recorded a 9.5 percent increase in gross written premiums and contributions in first-quarter 2019 following years of flat performance and declining profitability. This was joined with a 13.4 percent increase in profits, mainly from better investment returns," said S&P Global Ratings Credit Analyst Emir Mujkic.

However, despite these material improvements, the rating agency said that more than one-third of insurers in the sector continue to report underwriting losses.

Accumulated losses have in recent years eroded capital buffers and resulted in solvency issues and temporary, or even permanent, license suspensions for a number of insurers, particularly in Saudi Arabia - the largest Islamic insurance market in the GCC. This also has led to a number of negative rating actions in recent years.

To strengthen the sector, Saudi Arabian Monetary Authority, the Kingdom’s central bank, is assessing plans to increase minimum capital requirements for primary insurers to SAR 500 million, up from the current SAR100 million, the report noted.

Although details regarding the exact timing and amount have yet to be confirmed, an increase in minimum capital requirements of this magnitude would require almost 90 percent of insurers in the Kingdom to raise new capital, consolidate through mergers and acquisitions, or exit the market entirely, it added.

"In other markets such as the United Arab Emirates, where about 40 percent of takaful players do not comply with new solvency requirements adopted in January 2018, and in Kuwait, where a new law with higher capital requirements could be implemented in 2020, a significant number of companies will also need to increase their capital or consolidate," Mujkic said.