The impact on insurers’ business profiles, as a result of the current tension between Qatar and eight countries led by Saudi Arabia and the UAE, is likely to be negligible, but of greater concern are insurers’ exposures to Qatar’s stock and real estate markets, said A.M. Best.
Qatar’s insurance market remains dominated by local insurers, said the ratings agency. With the exception of Qatar Insurance Company, they are largely single market players with limited overseas exposure.
Similarly, most GCC insurers concentrate on their domestic market with limited premium exposure to Qatar; although some may have assets invested in the country.
Many insurers will have sizeable exposures to, and concentration within, Qatar’s equity and real estate markets. This is likely to create volatility, particularly over the short term, in risk-adjusted capitalisation and operating performance, said the agency.
Additionally, restrictions on air space, land borders and sea transportation against Qatar are likely to impact the marine, aviation and transport insurance lines. Reduced economic activity could also result in declining insured amounts for property and business interruption insurance.
The agency noted that the Qatari insurers it rates generally have strong balance sheets, with low net underwriting risk and surplus capital to absorb volatility in equity and real estate markets. Over the short term, it expects a limited impact on the credit quality of insurers.
However, if the situation persists over a longer period, then the economic repercussions on Qatar may be more severe and its effects could begin to impact the insurance sector and the rating fundamentals of A.M. Best-rated national insurers.
The MENA region is accustomed to turbulent times with periodic conflict, political upheavals and social disruption although geopolitical tensions have been elevated to new levels since 5 June this year.
Whilst GCC countries have not been immune to regional events, the UAE and Qatar have generally experienced the highest economic growth in the region in the past few years.
Fissures among the GCC countries have appeared, with Bahrain, Saudi Arabia and the UAE, in addition to Egypt and Yemen, severing diplomatic relations with Qatar on 5 June. The measures taken on 5 June greatly exceed previous disputes, with air space and shipping zone bans, the closure of Qatar’s only land border with Saudi Arabia and the expulsion of Qatari citizens from Bahrain, Saudi Arabia and the UAE.
In an attempt to mediate the current situation and de-escalate tension, Kuwait has stepped in to facilitate talks.
Potential effect on Qatar’s economy
As a result of the actions taken against Qatar, the country has suffered some short-term volatility in reaction to the events. While the price of oil has not shown any sudden movements, the Qatar Stock Exchange reported a decline of approximately 7.7% on 5 June to reach its lowest level since early 2016, with many stocks declining by the maximum 10% permitted by regulation.
Qatar is a significant importer of goods and services, with the bulk of these reliant on the land border with Saudi Arabia. The closure of the land border and the restriction on use of Saudi, Bahraini and Emirati airspace is likely to result in economic and social ramifications.
Moreover, there is uncertainty regarding the financial sector, and whether the Qatari companies will be able to trade with these countries and vice-versa.
A.M. Best believes that it is likely that Qatar’s riyal currency peg to the US dollar will remain under pressure, requiring government support from reserves at a time of low oil and gas revenues, resulting in increased fiscal pressures.
The ratings agency’s country risk methodology analyses country-specific factors that influence the credit quality of insurers. There are five different Country Risk Tier (CRT) categories, with CRT-5 representing the countries with more risk and CRT-1 denoting the lowest degree of risk.
A.M. Best considers Qatar, Saudi Arabia and the UAE to be CRT-3 countries. CRT-3 countries have a moderate amount of risk. Much of the risk for these countries is in the form of regional stability risk which is currently heightened. As of now, the agency does not foresee any changes to the current country risk assessments. M