Sunday 7 June 2020

Impact of low oil price and Covid-19 on GCC insurers

DUBAI, April 7, 2020

The insurance markets of GCC countries will feel the effect of lower oil prices and a Covid-19-driven reduction in economic activity on both underwriting and assets, said AM Best, a global provider of data services for the insurance industry.

Lower oil prices will impact the fiscal spending plans of governments in the region, which is likely to translate into reductions in infrastructure spending, added the new AM Best commentary “Impact of Low Oil Price and Covid-19 on GCC and Russian Insurers”.

A substantial proportion of underwriting in the GCC is linked to government-backed infrastructure projects that governments incept, notably property and engineering contracts.

Domestic insurers in the GCC often only have profiles and balance sheets that support them taking a small net share on large property and engineering risks. Nevertheless, they have benefited from strong inward commissions from regional and global reinsurers that bear the majority of these risks.

Profitability in the sector over the last five years has been buoyed by these commissions. Consequently, while a slowdown in new energy, property and construction risks may not impact the net written premium base of most domestic insurers, technical profitability is likely to deteriorate.

When there was last a significant fall in the price of oil, several GCC countries froze government spending. This impacted the top lines of some local insurers, particularly those with large engineering and construction books.

Although some countries in the region possess more diversified economies, most remain heavily reliant on oil revenue meaning that any fluctuations in the price of oil has a direct impact on national GDP growth.

However, unlike Russia, there has not been a clear link between GDP growth and premium growth in recent years due to the introduction of new compulsory lines (most notably medical insurance) and changes in tariffs, which have boosted insurers’ GWP. This is unlikely to continue to be the case as there are few remaining lines of business that could be classified as compulsory.

GCC insurers are less exposed to currency risk than those in other oil-producing countries, such as Russia, as GCC currencies tend to be pegged to the US dollar.

AM Best expects the investment portfolios of GCC insurers to be affected by lower oil prices as well as Covid-19-driven financial market volatility, as they are weighted towards equities and real estate. GCC equities in particular have shown a historically strong correlation to oil prices.

AM Best notes that among the GCC insurers it rates exposure to real estate and equities is 30 per cent and 17 per cent of total investments respectively. These exposures are high, relative to investment portfolios of insurers in developed countries.

Around 30 per cent of the investment allocations of AM Best-rated GCC insurers are to cash. However, AM Best analysis indicates that in the search for yield some insurers have used lower-rated banks. A further reduction in the credit quality of these banks, linked to increased financial and economic risk from oil price volatility and Covid-19, could lead to a decline in the security of their deposits.

Monitoring future

Developments In general, insurers in oil-rich emerging economies have seen notable growth in gross premium revenues over the last few decades, stemming from an increase in insurable risks. However, in the face of lower oil prices and the prospect of a Covid-19-driven global recession, investment is expected to slow considerably. As such, domestic risk carriers may no longer be able to achieve top-line premium growth at levels experienced over the past decade.

Just as the effect of the sudden drop in oil prices and the Covid-19 outbreak on oil-rich emerging economies is likely to vary, the impact on domestic insurance companies operating in these markets is also likely to vary depending on their asset quality and the lines of business written. In addition, AM Best believes that those insurers with more robust risk management frameworks are likely to be more resilient. – TradeArabia News Service


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