Insurance companies in Saudi Arabia are expected to report robust overall underwriting results in the first half (H1) of this year, S&P Global Ratings said in a new report.
The strong performance is driven by a sharp fall in motor and medical claims due to the COVID-19-related lockdown, the report added.
S&P further noted that the Kingdom’s government agreed to cover the majority of medical care costs related to COVID-19 and claims relating to non-urgent medical treatment substantially declined in H1 2020.
In addition, strict lockdown measures also led to a decline in motor claims during this period. As a result of these, most insurers are expected to report favorable underwriting results in H1 2020.
However, the ratings agency added that with the lifting of lockdown measures in late June, motor and medical claims are expected to come back to normal level or increase in the coming months, as traffic movement increases and policy-holders start visiting hospitals for non-urgent medical treatment.
Additionally, the value-added tax (VAT) increase to 15% from 5% from July 1 and cuts in social benefits for citizens will likely have a negative effect on consumer spending that will consequently impact growth and earnings prospects in H2 2020.
Overall, S&P expects the Kingdom’s insurance sector to still remain profitable this year, despite slower premium growth and substantially weaker profitability in H2.
The ratings agency also expects more consolidation in the sector over the coming quarters, given the fact that there is a relatively large number of small and loss-making insurance companies.
Nevertheless, it added that mergers will only be beneficial if shareholder expectations are realistic in terms of valuations and companies can benefit from factors such as larger scale, access to new lines of business, or other forms of diversification.
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