Economic growth is the single most important driver of the insurance business in the GCC and insurers need to gear up to capitalize on the growth potential of the region’s insurance sector, according to Alpen Capital’s latest insurance industry report.
T M Lakshmanan, the chief operating officer at Alpen capital, reiterated the findings; commenting that: “Overall the outlook for the insurance sector in the GCC region is positive,” and going further to state that: “While regional valuations are attractive, low insurance penetration and density reflect the opportunities for companies in the sector to position themselves strategically for periods of high growth.”
The insurance industry in the GCC has not been immune to the financial crisis. The stellar growth rates seen in the region prior to 2007 fell off the cliff as oil prices troughed on receding global activity and tightening credit markets.
While the insurance sector has been resilient and has continued to register modest growth, it is Takaful that continues to steal the limelight and its 32% year-on-year growth rate continues to offset reductions in the conventional sector.
According to Sameena Ahmad, the managing director of Alpen Capital, the GCC insurance industry is currently in a state of transition and “although the sector is relatively small when compared to other regions, it is expected to grow due to growth in GDP and favorable demographics”.
According to the report, as the region recovers from the downturn the diversified economic growth of the GCC countries, supportive government regulations and favorable demographics are creating an environment that is conducive for increased growth over the next five years.
Increasing GDP remains the primary growth driver for the insurance sector and life insurance will also gain momentum with rising populations and escalating per capita income.
Abdul Muttalib Al Jaidi, the CEO of Oman Insurance, who is cited in the report, states that: “The GCC insurance industry is going through a challenging phase. There are a large number of players in the market and innovative capability, product diversity, tailor-made products and client-focused claims management will be the distinguishing success factors.”
The region also suffers from a significant number of small insurers that lack sufficient capitalization and skills to underwrite or invest funds. The region therefore is highly dependent on reinsurers and is ripe for consolidation.
While there is an effort to diversify, the regional economy is dominated by the oil industry. A sharp decline in oil prices could strain resources and government spending, putting a brake on the developments that are currently underway. At the same time, the investment portfolios of the insurance companies are heavily tilted towards equities, making them vulnerable in a volatile market.
Overall, according to Alpen Capital’s report, the outlook for the sector is positive. Low penetration and density reflect tremendous growth opportunities for insurance companies. There are a number of positive drivers for growth and GCC insurers need to gear themselves up by enhancing their investment management and underwriting skills to optimize their profitability and fully capitalize on this growth opportunity.