Insurers in most GCC countries will likely face moderate-to-high credit risk in the next 12-18 months, said Moody’s Investors Service in a recent report.
“Weak oil prices and high exposure to volatile investment assets are driving credit risk for GCC insurers. These factors are partly offset by the low insurance penetration across the region and improving insurance regulation,” said Mr Mohammed Ali Londe, Assistant Vice President – Analyst at Moody’s.
Low oil prices are a headwind for the GCC insurance markets in the short- to medium term as they slow economic growth and weigh on government spending, said the report.
Growth in GCC insurance premiums slowed to 14% y-o-y in 2015 from 17% y-o-y in 2013, a rate still far exceeding those of advanced economies. The risk is greatest for insurers in Oman, Bahrain and Saudi Arabia, reflecting these countries’ oil dependence and high break-even oil prices.
The rating agency considers asset quality to be a key credit weakness for many insurers in the region. Infrequent bond issuance by GCC sovereigns and corporates limit insurers’ fixed income investment options, increasing their exposure to equity and real estate which leads to volatile investment returns. Investment risk tends to be lower in countries with more comprehensive regulatory regimes.
Moody’s said insurance regulation is a positive credit catalyst, but standards remain uneven across the region. The region’s regulations are evolving and are at different stages of development in each jurisdiction.
GCC regulators are moving towards risk-based capital requirements and actuarial-led reserving. The rating agency views such measures positively, as they support insurers’ credit quality, although their introduction may create short-term adjustment challenges.
The insurance market’s low penetration supports premium growth. Insurance penetration is below 2% in most GCC countries. The rating agency therefore expects insurance premiums to keep growing at a double-digit rate, despite weak oil prices.
The advent of compulsory medical coverage in some countries, and several global sporting and cultural events due to take place in the region – such as Expo 2020 and FIFA 2022 – are also supportive.