Despite the balance sheets of insurers in the Gulf Cooperation Council (GCC) remaining well capitalised, the potential for investment market shocks persists, leading ratings agency A.M. Best to hold a negative outlook on the GCC insurance markets.
Typically, insurance companies across GCC (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) markets benefit from extensive reinsurance support and substantial capital buffers, but A.M. Best warns that persistent pressures might result in volatility in firms’ operating performance and capital strength.
According to A.M. Best, the challenges for GCC insurers include ongoing low hydrocarbon prices, the introduction of value added tax (VAT), political instability and potential trade embargoes, combined with persistent price competition.
“Nevertheless, A.M. Best notes that risk management advances and improved regulatory sophistication partially mitigate these pressures,” says the ratings agency, in a recent GCC Market Outlook.
GCC insurers often rely on governmental support and spending for premium growth, but A.M. Best explains that lower hydrocarbon trading prices is pushing governments to look at new options, which has resulted in a reduced willingness to spend.
Furthermore, government-related policies are viewed as very profitable across the industries, as they benefit from strong participation from the reinsurance industry, and also solid levels of inwards reinsurance commission.
“A contraction in premiums derived from these policies, whilst not material to the net premium levels for insurance companies, could potentially put insurance profits under pressure,” says the ratings agency.
But despite the challenges, A.M. Best is anticipating increased insurance penetration across GCC regions, largely driven by mandatory health insurance programmes, as well as some countries announcing plans to lower their reliance on oil revenues.
Over the medium term, the ratings agency expects earnings from margins to come under increasing pressure, combined with low and volatile investment yields.
At the same time, GCC market participants are showing a greater focus on risk management, which could lead to higher demand for reinsurance protection as insurance penetration rises while volatility persists.
“However, A.M. Best notes that despite the introduction of a number of new tools and practices, risk culture – particularly at the board and executive management level – remains under-developed and a continued area of concern,” warns A.M. Best.
