Dubai: GCC countries have experienced massive regulatory change with respect to the insurance sector over the past 12 months, a move that could result in shakeout in the sector, ratings agency Standard & Poor’s said. While the new set of regulations are expected to have a positive long-term impact on the sector — in terms of better capital management, liquidity, internal controls and corporate governance — regional insurance firms, particularly Islamic insurers are facing rising costs.
Some of the recent regulatory changes include the doubling of the minimum capital requirements in Oman, enhanced liquid asset requirements in Kuwait and the UAE and more stringent solvency measures in Bahrain. S&P analysts say these changes will increase short-term pressure on players in these typically overcrowded markets by increasing costs. Sharia-compliant (takaful) insurers, in particular, are already struggling to manage high expense ratios because of their lack of scale.
Despite year-on-year premium growth of over 10 per cent in most GCC markets, the GCC insurance sector is overcrowded. Competition is particularly high in the takaful segment. More than 70 Sharia-compliant insurers in the GCC are competing for premium income of nearly $10 billion (D36.73 billion), about 80 per cent of which is based in Saudi Arabia. The dominant lines of business in most GCC countries are car and medical insurance.
“In our opinion, takaful companies have not sufficiently differentiated their product offerings from the conventional insurers, and are therefore targeting the same customer base, particularly in the fiercely competitive motor insurance market,” said Ali Karakuyu, a London based analyst at Standard & Poor’s.
“Unless they successfully differentiate their products and attract new insurance buyers to their Sharia-compliant product, we anticipate that it will be difficult for them to achieve sustainable growth.” Most GCC countries now regulate takaful entities separately. The UAE, Bahrain, and Oman introduced or enhanced specific regulations in recent months. While Qatar is in the process of rebuilding its regulatory framework with specific regulation for the takaful sector, Kuwait’s new insurance law, which is being implemented in 2015, has specific rules for the takaful sector.
In Bahrain, policyholders will enjoy stronger protection after the introduction of new rules in 2015 that include more-stringent solvency requirements, stronger financial reporting requirements and enhanced transparency. Companies, including takaful players, must file a financial condition report at least annually and inject capital into the policyholder fund if it’s in deficit.
Under the new standards in the UAE, both conventional and takaful insurers must complete a standardised risk-based solvency template, including capital calculations, and establish a risk management function and a more-structured investment portfolio. All solvency calculations and technical reserves will be subject to external reviews.
“The move to greater standardisation will particularly benefit the takaful sector. It introduces a single Sharia board at the central bank for all takaful companies, which should ease the cost and complexity of getting new products approved. The standardised financial statement format and reference to Islamic Financial Services Board accounting principles should also increase transparency, in our view,” S&P said in a note.
In Oman, the new regulations prohibit companies from selling takaful products unless they are Sharia-compliant and meet the Capital Market Authority’s requirements. Qatar’s takaful sector was once almost unregulated, outside the QFC Authority (QFCA), but in recent years, supervision by the QCB is being developed significantly.
In Saudi Arabia, the regulator enforced comprehensive actuarial reserve strengthening in 2013. Saudi’s regulator has also asked companies to adopt more risk-based pricing. The combination of these measures triggered price rises of more than 10 per cent at some companies. Kuwait lags behind its neighbours and it is the only GCC country that lacks an independent insurance regulator. However, it plans to establish independent regulatory and supervisory bodies and modernise its insurance regulations as part of the government’s efforts to turn Kuwait into a financial hub.
Originally published on www.zawya.com