GCC takaful providers may pursue more M&A deals; sector’s growth prospects favourable: Moody’s

Moody’s expects takaful providers in the GCC region to pursue more merger and acquisition (M&A) deals after profit probably fell last year amid rising claims and costs.In a report, Moody’s Investor Service said it expects Islamic insurance (takaful) providers in GCC to accelerate technology investment and seek more merger and acquisition (M&A) deals to build the critical mass needed to improve efficiency and comply with more demanding regulation."The sector’s growth prospects are favourable, reflecting the GCC region’s buoyant economy,” Moody’s noted."Moody’s expects takaful providers in Gulf Co-operation Council countries to accelerate technology investment and seek more merger and acquisition (M&A) deals. This follows a likely decline in their combined net income for 2022 as higher prices only partly offset rising claims and costs.’’, said Mohammed Ali Londe, vice-president and senior analyst at Moody’s Investors Service."The sector’s growth prospects are favourable, reflecting the region’s buoyant economy. Increased demand for health and life insurance, the spread of compulsory insurance coverage, and still low insurance penetration indicate ample scope for expansion, though intense competition will constrain future price increases. Many small takaful players will pursue M&A deals to build the critical mass needed to improve efficiency and comply with more demanding regulations,” Londe noted.Increased demand for health and life insurance, the spread of compulsory coverage, and still low insurance penetration indicate ample scope for expansion, though intense competition will constrain price increases.Continued economic expansion, led by government efforts to diversify away from hydrocarbons, will create growth opportunities for the GCC insurance and takaful sector.The GCC region’s post-pandemic economic rebound, fuelled by rising oil prices and government investment in economic diversification, will drive faster premium growth.Rising prices were a supportive factor in the second half of 2022, particularly in retail lines, where there was steep discounting during the pandemic.However, Moody’s expects intense competition to constrain future price increases. Increased demand for health and life insurance, the spread of compulsory insurance coverage, and still low insurance penetration indicate ample scope for future growth.In 2022, inflationary claims increases and a return to normal claims volumes after a pandemic-related decline put GCC insurers' profitability under pressure.Other headwinds include the adverse impact of volatile financial markets on investment performance, amplified by insurers' high exposure to equities and real estate. Tighter regulations around governance, risk and capital management have added to compliance risks and costs, particularly for smaller insurers."We expect many small takaful players to seek M&A opportunities to help them meet capital and other regulatory requirements, and to spread the cost of their digitalisation investments."We expect GCC takaful operators to raise their prices in response to rising claims, broader insured coverage in medical and higher reinsurance costs, although the increase will be limited by intense competition,” Moody’s noted.The impact of environmental, social and governance (ESG) considerations on the credit strength of most insurers in GCC countries is neutral to low, with good risk management and governance helping to offset their moderately negative exposure to environmental and social risks, it said.