GCC: Insurers expected to face high credit risk over next 18 months
Source: Middle East Insurance Review | Apr 2020
Insurers in most GCC countries will face moderate to high credit risk over the next 12 to 18 months, reflecting mounting geopolitical tension and intense competition, said a Moody’s Investors Service report.
Tensions between the US and Iran may harm investor confidence in the region and increase external financing costs. This could delay large scale infrastructure projects and weaken regional growth.
“Slowing growth would weigh on insurance demand, with property and casualty lines such as construction, marine & energy being particularly affected,” said Mr Mohammed Ali Londe, assistant vice president and analyst at Moody’s. “That being said, the GCC countries’ low rate of insurance penetration remains supportive of long-term future growth.”
Sector fragmentation
Market fragmentation in the region has led to intense competition among insurers, as small players strive to gain market share. Tough competition puts the sector’s profitability and capitalisation under pressure. Although many regional insurers have benefitted from ample reinsurance capacity and therefore have been able to share losses with reinsurers, Moody’s expects competition to drive consolidation in the long run, especially as smaller insurers are under pressure from more onerous regulatory requirements.
Volatile investment performance remains a credit risk for many GCC insurers, the rating agency also noted. Insurers in countries with more sophisticated regulatory regimes which rely on risk-based capital models and investment guidelines, such as Saudi Arabia and the UAE, are less affected.
Regulations are at different stages of development in each GCC country but are converging towards risk-based capital requirements and actuarial reserving. Such measures are supportive of insurers’ credit quality, although they create adjustment challenges for smaller operators, the agency said. M