Insurers and reinsurers operating in the Middle East are well-capitalised, although fiscal budget pressures and political instability overshadow strong balance sheets, according to a recent report from A.M. Best.
Commercial activity is highly correlated to oil demand and the recent period of low energy prices has depressed GDP growth and consequently investment and construction across the region. Fiscal budgets remain under pressure from low oil prices, which is likely to continue to result in reduced government expenditure and negative pressures in terms of business volumes.
In addition to the economic slowdown, ongoing pockets of political instability and conflict are expected to continue in 2017.
In light of these market conditions, there has been a slight weakening in a number of A.M. Best ratings in the region during the past 12 months. As at 31 December 2016, 81.1% of (re)insurers in the Middle East had a stable ICR outlook. More companies had a negative outlook (13.2%) than a positive outlook.
There were more downgrades (11.3%) than upgrades in 2016, driven by weakening capital positions and worsening technical performance for certain companies. The rating agency said 7.5% of ratings actions were upgrades as a result of improving capital positions, strong technical performance and the increasing strategically important role of certain players within larger groups.
A.M. Best noted that bigger Middle Eastern insurers and reinsurers enjoy dominant market positions. Market leaders exhibit strong technical performance as they have established effective distribution systems, making it challenging for rivals that have set up more recently. Excess capacity and intense competition have resulted in difficulties for new market entrants to attract good quality business.
Companies operating in the Middle East face significant investment risk as, in certain countries, equity markets face illiquidity issues. Shares are often tightly held, with trading volumes lower than those in more mature stock markets. As investment markets tend to be volatile, companies tend to be well-capitalised to offset these risks.
Sound capitalisation has also been driven in part by more stringent regulatory demands for some countries in the region, such as Saudi Arabia and the UAE. This has placed certain pressures on companies’ management and balance sheets.