Lower asset valuations in 1Q2020, a result of the economic fallout triggered by COVID-19, is expected to have a negative impact on the solvency levels of Bahraini insurers, adding to the challenges of the local reinsurance sector.
The Bahrain (re)insurance market is very competitive with a large number of companies vying for a limited amount of premiums, according to AM Best in its market report. The performance of local insurers is heavily influenced by investment results. Local insurers typically take more asset risk than their peers in mature markets – with exposures to equities and real estate generally higher among local insurers than those in developed economies, said the report.
Equity risk, as measured by AM Best’s risk-adjusted capital model, is the largest component of required capital for AM Best-rated entities in Bahrain.
While the good solvency buffers of the large local insurers will allow them to absorb the financial market shock, the rating agency said there is concern as to how insurers with lower solvency levels will cope with the additional stresses in the short term, particularly in the event of a second wave of COVID-19 infections later in the year.
Furthermore, the economic slowdown that followed the spread of the pandemic could also lead to liquidity pressures for some corporate customers, heightening the credit risk for local insurers. The shutdown of certain activities is expected to affect premium volumes in the market, especially for motor, business interruption, workers’ compensation, employers’ liability and commercial third-party liability lines, said the report.
Oil prices are expected to remain under pressure due to reduced levels of demand globally. This will impact government spending and infrastructure projects, which in turn, will affect demand for insurance.
COVID-19 has also delayed the implementation of compulsory medical insurance, approved by the government in 2016. The scheme was expected to boost the medical line of business and revitalise the non-life sector. M