What will shape GCC’s insurance market in 2017?

March 6, 2017 5:48 pm

Macroeconomic uncertainties and industry-specific developments will shape insurance sector in GCC this year.

While in UAE, insurance companies will likely see a medium-term improvement in their credit profiles as the sector adjusts to financial regulations introduced in 2015 and as overcomes initial compliance hurdles, other major countries in the region will probably face moderate-to-high credit risk over the next 12-18 months, according to Moody’s Investors Service.

Rising costs and consolidation

The UAE’s government had introduced new regulations that include the implementation of proper reserving, actuarial certifications, introduction of better governance and controls and re-alignment of investment portfolio.

“UAE’s new financial regulations should, in the medium term, underpin insurers’ profitability as well as their capitalization, asset quality and reserve adequacy,” says Mohammed Ali Londe, Assistant Vice President- Analyst at Moody’s.

“At the same time, price competition may ease as increased regulatory costs trigger industry consolidation and price hardening,” Londe adds.

Industry consolidation is likely as a result of the new regulatory landscape. “Additional costs associated with the new regulations may prompt consolidation of smaller insurers, or encourage them to focus on
business lines that yield adequate returns,” says Londe.

Profitability pressure

Profitability for UAE insurers remains under short-term pressure as new actuarial reserve-setting and reporting requirements will drive continued technical reserve strengthening in 2016 and 2017.

Over the medium term, however, stricter reserving requirements will likely encourage adequate premium rate-setting market-wide, supporting profitability.

Asset quality will also likely improve for insurers as the new rules will over time limit insurers’ traditionally high exposure to riskier assets such as equities and property.

In addition, Moody’s expects solvency to improve overall as the regulations set capital requirements tailored to the specific risks borne by each company.

Low oil prices and government spending

Londe says “Weak oil prices and high exposure to volatile investment assets are driving credit risk for GCC insurers.”

“These factors are partly offset by the low insurance penetration across the region and improving insurance regulation.”

Moody’s says low oil prices are a headwind for the GCC insurance market in the short to medium term, as they slow economic growth and weigh on government spending.

Growth in GCC insurance premiums slowed to 14 per cent in 2015 year on year (y-o-y) from 17 per cent in 2013 y-o-y, still far exceeding growth rates in advanced economies.

The risk is greatest for insurers in Oman, Bahrain and Saudi Arabia, reflecting those countries’ oil dependence and high break-even oil prices.

The rating agency considers asset quality to be a key credit weakness for many insurers in the region.

Infrequent bond issuance by GCC sovereigns and corporates limit insurers’ fixed income investment options, increasing their exposure to equity and real estate which leads to volatile investment returns.

Insurance penetration

Investment risk tends to be lower in countries with more comprehensive regulatory regimes.

Moody’s says insurance regulation is a positive credit catalyst, but standards remain uneven across the region.

The region’s regulations are evolving and are at different stages of development in each jurisdiction.

GCC regulators are moving towards risk-based capital requirements and actuarial-led reserving.

Moody’s views such measures positively, as they support insurers’ credit quality, although their introduction may create short-term adjustment challenges.

The insurance market’s low penetration supports premium growth. Insurance penetration (the ratio of insurance premiums to GDP) is below 2 per cent in most GCC countries.

Moody’s therefore expects insurance premiums to keep growing at a double digit rate, despite weak oil prices.

The advent of compulsory medical coverage in some countries, and several global sporting and cultural events due to take place in the region – such as EXPO 2020 and FIFA 2022 – are also supportive, it says.


AMEinfo Staff
By AMEinfo Staff
AMEinfo staff members report business news and views from across the Middle East and North Africa region, and analyse global events impacting the region today.