'Need for consolidation among smaller insurers'

19 August 2013

Some insurers could even default over time if unable to increase scale, says Standard & Poor’s

Many GCC insurance companies established in the past few years need to consolidate to avoid risking capital deficiency or even default, according to the US’ Standard & Poor’s (S&P) Ratings Services.

In the UAE, lesser-established insurance companies are not profitable enough because they lack economies of scale and sufficient business volumes, according to the ratings service.

“It is just a matter of time before these companies start to run out of capital and face a risk of default. Therefore, for some companies, consolidation makes economic sense,” said S&P in a statement.

“If companies merge, it could improve their economies of scale and offer them cost efficiencies. Acquirers tend to be more successful entities, indicating that they are better managed or that they have larger resources at their disposal. Consequently, an acquired entity may benefit from the resources, know-how and technical expertise of its new management team.”

Intense competition among regional insurers has generally led to established insurers being profitable, but newer players registering losses as they favour business growth above profitability. That has led to disproportionally low premium rates and expectations for medical insurance premiums in particular to rise 20 to 30 per cent annually.

In Saudi Arabia, the three largest companies reported 80 per cent of all profits in 2012, while nearly a third of Saudi insurers reported losses. A similar trend emerged in the UAE, where the three largest companies reported more than 80 per cent of the market’s profits in 2012. Excluding takaful companies, the figure is more than 50 per cent.

The GCC insurance sector grew to nearly $16bn in terms of gross premiums written, with growth rates of more than 10 per cent in the region’s largest insurance markets in 2012, according to S&P.

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