AM Best said it is revising its market segment outlook for the insurance markets of the GCC region to ‘stable’ from ‘negative’.
Factors contributing to the change in outlook include the economic recovery experienced across the region driven by rallying oil prices and the increased growth opportunities in the insurance sector, as well as the demonstrated resilience of insurers’ balance sheets.
In its market segment outlook report, ‘Market Segment Outlook: Gulf Cooperation Council Insurance’, the ratings agency noted that the resurgence in demand for oil and the resultant buoyant price environment has brought economic relief the GCC region. The agency expects strengthening economic fundamentals to directly contribute to the demand for insurance products in the near term.
AM Best said that as economic activity increases, the demand for insurance protection (particularly in core classes such as motor and medical) could also increase.
Furthermore, near-term premium growth opportunities are highly likely to come from the implementation of long-awaited mandatory insurance schemes in several markets across the GCC. For example, Oman’s compulsory medical cover is now being rolled out following implementation delays due to the COVID-19 pandemic.
Concerns
However, the report noted that near-term concerns remain. These include the highly competitive operating environment fuelled by the large number of market participants and the associated pressure this brings to pricing. This in turn poses a threat to technical margins, particularly in medical and motor segments. Furthermore, preparedness for the implementation of IFRS17 remains uncertain and a key challenge in the coming years.
GCC insurers have demonstrated their ability to withstand economic and market shocks brought on by the COVID-19 pandemic; however, the region remains sensitive to the potential for future pandemic-related volatility.
Longer-term operational and economic challenges
AM Best also said that the countries of the GCC have demonstrated their continuing economic reliance on hydrocarbon prices over the past 18 months. Although rallying oil prices are supporting economic recovery, the member states of the GCC, and the insurers that operate in them, will need to adapt and manage the longer-term transition risk presented by global commitments to reduce dependence on petrochemicals and the diversification of economic revenue streams to non-hydrocarbon sources.
While economic transition is a longer-term consideration, the diversification of fiscal revenues presents near-term operational considerations for insurers. In attempts to reduce the fiscal reliance on hydrocarbons, more countries in the region have begun establishing new revenue streams including the introduction of, and in certain cases, increases in the existing rates of VAT, while the UAE has announced plans to introduce corporation tax from mid-2023. Actions such as these present operational risks for insurers that must be managed over the course of their implementation periods. M