Global financial services ratings agency A.M. Best has revised its outlook on the Gulf Cooperation Council (GCC) insurance markets to negative, amid economic downturn across the region and an expectation of fading insurance demand.
Lower oil prices and COVID-19 containment measures across the region has resulted in significant economic downturn, notes A.M. Best.
Supply chains, travel, and consumer spending have all been adversely impacted by the pandemic across the region, and while governments in certain countries across the GCC have been quick to act, A.M. Best warns that there’s already a “sharp slowdown in economic activity”.
Exacerbating the challenge for GCC insurers, oil prices declined in March 2020 on the back of reduced demand as a result of COVID-19-induced containment measures, which resulted in a supply/demand imbalance.
“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,” says A.M. Best.
In addition to the challenging economic landscape, A.M. Best’s outlook revision to negative also reflects and expectation of reduced demand for insurance following the delay in rollout of mandatory health insurance in both Oman and Bahrain, the postponement of EXPO 2020 in Dubai, combined with the potential delay of government infrastructure projects.
“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,” says A.M. Best.
As with insurers in all parts of the world grappling with the challenges arising from the ongoing COVID-19 pandemic, regional GCC insurers are exposed on both their underwriting and assets. The ratings agency warns of adverse impacts on capital buffers derived from financial market volatility and the possible decline in real estate valuations.
Offsetting some of the negativity, A.M. Best says that the introduction of regulatory requirements in recent years in Saudi Arabia, the UAE, and Qatar, has resulted in the implementation of more robust governance and risk management frameworks. Furthermore, insurers in the region are generally well-capitalised and able to withstand stress scenarios, states A.M. Best.
