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COVID-19 And Lower Oil Prices Could Accelerate Consolidation Among Saudi Arabian Insurers

Global Ratings credit analyst Emir Mujkic discusses the expectation that despite negative economic growth, the Saudi insurance sector will report strong underwriting results for H1 2020. This is due to benefiting from fewer motor and medical claims since the COVID-19-related lockdown

The Saudi Arabian insurance sector recorded a significant improvement in GWP growth and profitability in 2019 New claims, a constrained economy, a higher VAT rate, social benefit cuts, to negatively impact consumer spending This will further increase competition and accelerate consolidation in the market

After a material improvement in growth and earnings in 2019, S&P Global Ratings expects the Saudi Arabian insurance sector to report solid underwriting results in first-half 2020, benefiting from fewer motor and medical claims due to the COVID-19-related lockdown, despite negative economic growth.

We now forecast Saudi economic output (measured in GDP) will contract by about 3% in 2020 before we see modest positive growth of 1.6% in 2021.

With the lifting of strict lockdown measures in late June, we expect that motor and medical claims will pick up, as traffic flow increases and policyholders start returning to hospitals for nonurgent medical services in the coming months. The increase in value-added tax (VAT) to 15% from 5% from July 1 and cuts in social benefits for citizens could further pressure consumer spending, in our view. Insurers are therefore likely to experience a slowdown in premium collections, since many consumers and businesses could delay their premium payments in an attempt to manage cash flows. This would pressure asset quality, liquidity, and consequently credit conditions of some players. However, we expect the sector to still remain profitable overall in 2020. 

“With the lifting of strict lockdown measures in late June, we expect that motor and medical claims will pick up, as traffic flow increases and policyholders start returning to hospitals for non-urgent medical services in the coming months,” said S&P Global Ratings credit analyst Emir Mujkic.

“Following two recent merger announcements, we expect to see further and accelerated consolidation in the sector over the coming quarters, given that there is a relatively large number of small and loss-making insurers,” Mujkic concluded.

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Better Underwriting Results Are A Key Profitability Driver 

Following two years of declining gross written premiums (GWPs), the Saudi Arabian insurance sector saw GWP growth of about 8.3% to Saudi riyal (SAR) 37.8 billion in 2019 from SAR34.9 billion in 2018. This was mainly spurred by rate increases and the extension of mandatory medical cover to a wider part of the population.

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Insurers Could Be Negatively Affected By The Weak Economy And A Decline In Disposable Income In The Short Term 

Measures taken to contain COVID-19, including travel bans and curfews; lower oil prices, leading to delays or cancelations of nonessential infrastructure projects; and a general decline in disposable income due to the VAT increase and social benefit cuts could negatively affect GWP growth and earnings prospects over the next year. We anticipate that the number of insured individuals under medical policies will decline and that some employers will opt for more basic and cheaper medical cover for staff in an effort to save costs. A slowdown in economic activity and consolidation in a number of sectors has already led to job cuts and cost-saving measures in recent years. Although the local population continues to expand, this will likely be offset by the departure at least 600,000 (mainly blue-collar) foreign workers that could be forced to leave Saudi Arabia in 2020 due to job losses or Saudization requirements. In addition, consumers will also likely defer purchases of new cars and other items due to economic uncertainty.

Only about 50% of cars in Saudi Arabia are adequately insured), will lead to satisfactory growth in the medium term, we now anticipate that total GWP will decline by up to 5% in 2020. In our view, new mandatory medical covers for Hajj and Umrah pilgrims that were introduced in early 2020, but put on hold due to COVID-19-related travel restrictions, could generate additional GWP of SAR1.5 billion-SAR2.5 billion in 2021 and help the market return to growth. However, this is assuming foreign visitors are allowed to attend the pilgrimages next year. We also believe long-term life insurance products, which currently contribute less than 4% of total GWP, may experience an increase in demand, particularly for coverage of critical illnesses.

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Overall Capitalization Remains Satisfactory, But Weak Earnings Will Lead To Further Consolidation 

The sector’s total shareholder equity increased by about 10% to SAR16.4 billion in 2019 from SAR14.9 billion in 2018, since a number of insurers retained profits or raised additional capital through rights issues. Like the previous year, growth in shareholder equity exceeded premiums in 2019, which indicates a slight improvement in overall capitalization. However, Saudi Arabia’s insurance sector remains highly concentrated in terms of GWP and earnings. In 2019, the five largest primary insurers (out of a total of 32) had a market share of about 68% (2018: about 66%). Moreover, the largest insurer, BUPA Arabia, crossed the SAR10 billion GWP mark for the first time, but there were 13 companies that generated less than SAR367 million ($100 million) and another six that wrote less than $200 million.