GCC insurance industry on a stable footing
Dubai, March 5, 2014
The GCC insurance industry remains on a stable footing supported primarily by (re)insurers' very strong capital adequacy and generally adequate competitive positions, said a report by Standard & Poor's Ratings Services.
The average financial strength rating (FSR) for the 34 GCC (re)insurers that was rated by S&P remains adequate, at 'BBB+'. This is consistent with the average rating level for the sector in recent years, the report stated.
Currently, about 60 per cent of our indicative stand-alone credit profiles (indicative SACPs; derived before taking sovereign risk and group support into account) on GCC-based (re)insurers are concentrated at the 'bbb+/bbb' level, said the S&P report.
This solid performance comes at time when the GCC insurers and reinsurers are facing issues of low interest rate and increasing competition for market share.
By comparison, indicative SACPs for Western European (re)insurers center at 'a-', which is in line with the global median for insurance companies. This variation between GCC and European (re)insurers is mainly due to stronger competitive positions that result in stronger
business risk profiles (BRPs).
Fifty-five percent of European (re)insurers have at least strong BRPs, compared with less than 20 per cent for GCC companies. No GCC (re)insurer has a BRP which we view as any better than strong, said the ratings agency.
According to S&P, the risk-based capital continues to be the key ratings strength of GCC-based (re)insurers.
"Our view of the BRP of Gulf-based (re)insurers generally supports the ratings. On average, the sector's insurers have satisfactory BRPs, which reflects our view that they face intermediate industry and country risk on average and have varying competitive positions from generally less-than-adequate to strong. But the dominant competitive position is adequate," stated the report.
S&P said its insurance industry and country risk assessments for GCC countries compared well with those of developed insurance markets. "Excluding Oman, the factors that make up industry risk contribute positively to our overall view of GCC (re)insurers' BRPs," it added.
The ratings agency pointed out that unlike rated European (re)insurers, the GCC-based companies were generally limited in terms of geographic diversity. This is because for a non-domestic company, it's generally difficult to break through into profitable lines that are repeatedly renewed by established local players, it stated.
"Over the past few years we've seen a number of GCC insurance companies starting up takaful operations, notably in Kuwait and Bahrain, but they've found it difficult to avoid underwriting the fiercely competitive compulsory retail lines, such as medical and motor insurance, at a loss," said S&P in its review.
In the face of increasing competition, the established players have managed to protect their profitable large-ticket businesses. However, for some companies this came at the expense of premium reductions caused by lower pricing and loss of business. Therefore, those companies with a less favorable (that is, less than adequate) competitive position typically have portfolios dominated by underpriced retail motor or medical business.
"Although we recognize that average risk-based capital (measured using our model) is very strong, we believe that the small capital base of most GCC (re)insurers potentially makes them more vulnerable to losses than we assume in our capital model," said the report.
S&P said one of the GCC (re)insurance sector's key strengths is its capital position, reflected in the agency's average assessment of very
strong capital adequacy.
"Indeed, 20 of the 34 (re)insurers we rate in the region have their risk-based capital assessed as extremely strong. We recognize that some companies are in a growth phase, meaning they have yet to utilize their capital base," said the report.
Despite the impact of high risk assets the very favorable capital positions and strong liquidity of the GCC (re)insurers, is generally enough to offset these risks, it added.
In its future outlook, S&P said, "Looking ahead, we expect our ratings on GCC (re)insurers to remain stable over the next 12-24 months due to their capital strength. We base our view on the stable outlooks assigned to 27 of the 34-strong portfolio, which reflect the companies' generally very strong capital adequacy and strong technical earnings."
"Although all GCC insurance markets are competitive, the majority of primary insurers maintain favorable underwriting margins due to the strengths of the core business and the willingness of global reinsurers to continue providing capacity to the GCC sector. However, we see signs that the type of reinsurance cover purchased by local companies is changing," it added.-TradeArabia News Service