Monday 21 September 2020

GCC insurance markets outlook turns negative: study

DUBAI, June 4, 2020

Economic downturn across the region stemming from lower oil prices and Covid-19 containment measures is among key factors that drive the outlook on GCC insurance markets to negative, said credit rating agency AM Best in a new report.

The report titled “Market Segment Outlook: GCC” highlights other key factors that drive the negative outlook:

• The expectation of lower insurance demand following the delay in rollout of mandatory health insurance in Oman and Bahrain, postponement of EXPO 2020 in Dubai, and the potential delay of government infrastructure projects
• Adverse impact on capital buffers stemming from financial market volatility and potential decline in real estate valuations
• Expectation of increased delays in cash collection related to both premium receivable from policyholders, as well as balances due from other insurance companies

Factors partly moderating these negatives on the market include:

• The introduction of regulatory requirements over the past five years in Saudi Arabia, the United Arab Emirates (UAE), and Qatar, which have encouraged companies to implement more robust governance and risk management frameworks
• Insurers in the GCC are generally well-capitalised and capable of enduring stress scenarios The coronavirus (Covid-19) pandemic and subsequent quarantines, have led to disruption to supply chains, travel restrictions, and a general reduction in consumer spending, which together increase the likelihood of a global recession.

Governments in the GCC countries have been quick to act, both in terms of containment measures and fiscal stimulus packages to try to mitigate the economic damage, the report said.

Although these steps will soften the economic blow, AM Best has already noted a sharp slowdown in economic activity, with the International Monetary Fund forecasting decreases in real gross domestic product (GDP) across all GCC countries.

Oil prices dropped in March 2020, given the weakened demand due to the Covid-19-driven economic slowdown and consequent excess supply. Despite an agreement by OPEC+ to cut oil output in April 2020, prices have remained volatile and are expected to be sensitive to demand-related developments.

The GCC insurance markets will feel the effect of lower oil prices and a Covid-19-driven reduction in economic activity on both underwriting and assets. Most countries in the region remain heavily reliant on oil revenue, although some (such as Saudi Arabia and the UAE) are less reliant than others. Any fluctuations in the price of oil will therefore have a direct impact on national GDP growth.

While the ultimate impact of the Covid-19 pandemic on the GCC insurance market is unknown at the time of writing, it is expected to have a materially negative effect on most economies in the GCC as well as global investment markets. AM Best expects that this will, in turn, lead to pressure on insurers’ results and solvency.

Subdued economic growth

Over the last few years, the region’s insurance premium has grown faster than GDP. However, that growth has been volatile, having been boosted by the implementation of mandatory insurance business lines. In theory, an expanding economy with insurance penetration remaining constant, should allow some headroom for reasonable premium growth.

However, AM Best expects premium volumes to contract in 2020, partly reflecting delays in implementation of new mandatory medical lines in Oman and Bahrain, as well as reduced demand for non-compulsory insurance products.

Furthermore, the importance of oil prices and their relationship to public spending is significant as GCC insurers have historically relied on government spending – particularly on infrastructure projects – for premium growth. Government related engineering and property policies are considered highly profitable for local insurers, who benefit from strong levels of inward reinsurance commission due to the extensive reinsurance participation on these policies.

A delay to government-led infrastructure projects, as governments work to contain the spread of Covid-19 and cope with lower oil revenues, may not be material to net premium levels for the region’s insurers, but could have a significant impact on insurance profits.

In an already fiercely competitive market, the reduction of insurable risk and consumer demand will exacerbate pricing pressure. However, AM Best expects the price declines in some markets to be tempered by the regulatory-induced technical pricing of mandatory covers and the overall improvement in insurers’ underwriting discipline and pricing tools.

GCC insurers facing investment pressures

A characteristic of Middle East insurers is that they tend to take more asset risk than they do insurance risk. AM Best notes that among the GCC insurers it rates, exposure to real estate and equities is 30% and 17% of total investments, respectively. These exposures are high, relative to investment portfolios of insurers in developed countries. Given this weighting, AM Best expects GCC insurers to experience material balance sheet volatility in 2020.

GCC equity markets fell by as much as 30% between year-end 2019 and late April. AM Best noted a partial recovery in equity markets in response to various government stimulus packages. Insurers with material holdings in real estate are likely to face further pressure on the value of their investment portfolio.

AM Best notes that a number of companies impaired their real estate valuations in 2019 given the excess supply in the region. Concerns around demand and supply of real estate are likely to be exacerbated by Covid-19, which could affect both fair values and liquidity.

AM Best expects that the fall in equity markets and potential decline in local real estate valuations will erode capital buffers. Moreover, central bank interest rate cuts, dividend freezes, and impairments to real estate valuations will reduce investment income and negatively impact profitability in 2020. – TradeArabia News Service


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