Local insurance regulators in the Gulf, which have a mixed track record in enforcing regulations, will need to step up their game in order to take on additional and more sophisticated supervisory requirements, said Standard & Poor’s Ratings Services (S&P).
In a report, “GCC Insurance Regulation: Companies and Regulators Will Both Have To Up Their Game”, S&P noted that regulatory changes have been the talk of insurance markets in most countries in the region over the past year. Insurance regulators have introduced or are introducing new regulations and following international best practices by moving toward risk-based solvency capital regimes.
S&P sees the key, and long overdue, changes as: the calculation of solvency and minimum capital requirements, the compulsory independent review of solvency and technical reserves, more focus on active risk management, and the introduction of more structured investment portfolios with maximum asset exposure limits.
However, it said, “despite increasing economic collaboration and policy coordination within the GCC, insurance regulations and supervisors are still at different stages of maturity within the region. We see little evidence of regional collaboration, and thus a lack of standardisation and ambition in the approach to regulation of the insurance industry.
“We believe the effectiveness of the new regulations will be determined primarily by the determination of regulators to ensure adoption by the market and consequently enforcement by supervisors. Furthermore, we expect the full effect of the new regulations will take some time to play out, given grace periods for insurers to implement new regulation, which can be up to three years for certain rules, such as the implementation of more structured investment portfolios.”
S&P Credit Analyst Emir Mujkic said of steps to enhance regulation in the still under-developed insurance markets in the Gulf: “These changes are likely to provide more cushion to the financial soundness of the industry in the long run, leading to better protection for policyholders and improved credit profiles for insurers, resulting from better capital management and optimised operational controls.”
However, in the short term, S&P anticipates the cost of regulatory compliance to rise, as insurers will need to add expertise and improve their systems to meet the new regulatory demands. “We believe that smaller and less well-capitalised insurers will find the new regulations particularly challenging, while larger companies should be able to cope with the additional demands,” said the report.