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Qatar: Insurers unfazed by economic embargo

Source: Middle East Insurance Review | Mar 2018

The economic blockade against Qatar, now into the ninth month, is expected to have only a limited impact on the credit quality of insurers in Qatar, which is slated to see uniform policy guidelines for the sector, reported Gulf Times, citing A.M. Best.
 
   Although the MENA region is accustomed to political and economic turbulence, with periodic conflicts, the GCC itself has historically remained relatively calm, said the report. 
 
   Nevertheless, geopolitical tensions were elevated to new levels in 2017 when Saudi Arabia, the UAE and Bahrain severed diplomatic relations with Qatar, and imposed trade and travel sanctions last June. These actions have not had a material impact on the insurance operations of carriers in the region, although investment markets have seen volatility, said the ratings agency.
 
   “Over the short term, we expect a limited impact on the credit quality of Qatari insurers,” it said.
 
   Highlighting that pricing pressure has been alleviated partially in markets such as Saudi Arabia and the UAE, driven by regulation mandating actuarial pricing and the introduction of uniform policy guidelines, the agency said similar trends are expected in Qatar. 
 
   Regulatory requirements in Saudi Arabia, the UAE and Qatar have encouraged insurers to implement robust governance and risk-management frameworks, which include actuarial pricing and reserving for motor and medical lines of business, enhanced capital management, increased management control on investments, and a rationalisation of dividend policies.
 
   The balance sheets of Gulf insurers are generally well-capitalised but “vulnerable” to investment market shocks, particularly in the face of heightened economic and political uncertainty, it said.
 
   Risk-management advances and improved regulatory sophistication partially mitigate the GCC insurers’ challenges, including persistent low hydrocarbon prices (and the resultant pressure on public spending), the introduction of VAT, political tensions and trade embargoes, and the unrelenting level of price competition, said A.M. Best.
 
   Highlighting that GCC insurers have historically relied on government spending for premium growth – particularly for infrastructure projects, it said with hydrocarbon prices trading below breakeven levels, governments have been reconsidering their economic policies, as demonstrated by restraint in increasing spending.
 
   “Overall, the impact on premium growth for the GCC market has been somewhat limited. However, capital levels have been exposed to volatility from fluctuating asset prices as a result of low oil prices,” the agency said, adding that should economic uncertainty regarding long-term oil prices continue, investment return volatility is expected to linger.
Government-related engineering and property policies are considered highly profitable, benefiting from heavy reinsurance participation and strong levels of inwards reinsurance commission, it said.
 
   “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,” the agency cautioned. There have also been minor premium collection issues in connection with government-related policies.
 
   Despite this, insurance penetration is expected to increase in GCC countries, primarily stemming from further roll-outs of mandatory health insurance.
 
   M&A activity was a common theme throughout the GCC in 2017, with several transactions in Bahrain, Saudi Arabia and the UAE. Despite this consolidation, the number of market participants continue to be excessive, relative to the level of premium volumes generated. “Competition remains cut-throat, with companies continuing to prioritise top line growth over bottom line profitability,” the agency said. M 
 
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