Subdued oil prices and rising political risk are two major headwinds facing the region, although insurers are strengthening their fundamentals to ensure much needed resilience in the industry.
Insurers in the Middle East head into 2017 with the prospect of lower government spending amid subdued oil prices and a heightened level of political risk in the region, which are likely to have repercussions for insurance markets across the region. This is against the global backdrop of a sluggish business environment and persistently low interest rates which act as headwinds for the global insurance sector.
Low oil price
In the Middle East where the oil cycle tends to dictate economic outlook for many countries in the region, the persistent low oil prices will contribute to economic pressure on the GCC oil producers.
“Growth in oil-exporting Gulf countries will generally be subdued, as governments continue to rationalise their spending and reform generous subsidy regimes in an environment of still-low oil prices. Growth will remain challenging for most oil importers, held back variously by political risk, fiscal adjustment, insufficient reforms and spillover from weak GCC growth,” said Fitch Ratings in a recent report.
Much of the growth in gross premiums in the region in recent years have mainly been the result of both the introduction of compulsory insurance, and also government and private sector spending on infrastructure and industrial projects. This is especially so in the oil-rich GCC countries which has seen significant government expenditure amid budget surpluses on the back of strong oil prices.
A slowdown in new property and construction risks may not have a big impact on the net written premium base of most local insurers in the region – given that most of the risk is ceded to international insurers. However, the subsequent loss of income from the high levels of inward reinsurance commissions when ceding these risks may be a significant factor, said A.M. Best.
“The technical profitability of local and regional insurers has been buoyed by the level of inwards reinsurance commissions which has been a key feature of earnings over the last five years. However, as many local insurers’ underwriting performance has trended negatively over the last three years, driven largely by intensifying market competition, a drop in inwards commissions is likely to lead to further pressure on earnings,” the ratings agency said in a recent report.
Nonetheless, A.M. Best noted that within the GCC, Qatar is less susceptible to the long-term impact of weak oil prices as it is one of the world’s largest exporters of liquid natural gas, prices of which have not fallen as much as oil over the past year.
Meanwhile, the UAE with its relatively limited oil production, maintains a much more diverse economy compared to its Arab neighbours.
As a consequence, both the UAE and Qatar are perceived to have the greatest level of long-term economic stability in the region, added A.M. Best.
Political instability and insecurity remain key sources of risk to MENA sovereigns in 2017, with ongoing wars in Syria, Yemen, Libya and Iraq.
While political stability has improved in several North Africa states compared to the immediate aftermath of the Arab Spring, security issues nonetheless persist.
Meanwhile, political risk in the region has also been exacerbated by the uncertainty around the policies of the incoming Trump administration.
“The US President’s comments on the Middle East have suggested the aim of greater isolationism. Whether this could further tip the balance of power in Syria in favour of the Assad regime is unclear, but Fitch still expects spillovers from the Syrian conflict and the wider fight against IS to remain a source of risk to the region,” said Fitch ratings.
For most local insurers, political instability and unrest has not significantly impacted their performance in the short-term, noted A.M. Best. However, political tensions in countries like Egypt and Lebanon have resulted in pronounced economic issues – such as inflation and foreign exchange movements – and financial market volatility.
“Inflation assumptions are essential when setting premium rates for long-term policies and can also affect sum assured values over time. Additionally, claim and expense costs are often very sensitive to movements in inflation, with a shift outside of an insurer’s expectation easily able to move technical operations from a profit to loss position,” said A.M. Best.
To combat such issues, some local and regional insurers look to write risks in US dollars. Some insurers have also benefited from the regional unrest by responding to increasing demand for political violence cover – often as riders to existing policies.
Amid the challenges, there are of course many bright spots for insurers in the region.
Firstly, more compulsory insurance will be introduced in the near future, especially in the GCC markets which will boost premium growth. Health insurance is expected to expand robustly as governments enact laws requiring compulsory health cover for both nationals and expatriates.
Secondly, the current move by Gulf States to reform their economies will lead to greater economic diversification and lesser concentration of business in the insurance markets. The continued expansion of the SME segment in the GCC bodes well for insurers, offering the chance to promote various forms of corporate covers.
This will of course depend on the level of awareness for risk management amongst corporates, which has shown signs of improvement. This brings us to the third factor in that there is also greater focus on risk management within the insurance sector – brought about by large losses in markets like the UAE for example.
In order to cope with the various challenges in the long term, enterprise risk management is crucial and anecdotal evidence suggests more and more insurers are adopting a proactive approach to risk management.
Last but not least, strengthening regulations across various markets has resulted in more actuarial-led pricing and better technical standards, thus setting a strong foundation for profitable growth in 2017 and beyond.