GCC: Counterparties' tightening liquidity poses hurdle to insurers' recovery of receivables
Source: Middle East Insurance Review | Dec 2020
Insurers in the GCC countries are exposed to substantial levels of receivables, putting them at risk of increased provisioning and exacerbating pressure on their profitability, said Moody’s Investors Service in a report.
“The coronavirus-driven economic shock caused a sharp decline in oil prices that widened the region’s budget deficits and will weigh on public spending across the region with negative economic consequences,” said Moody’s (Dubai) vice president – senior analyst Mohammed Ali Londe. “In particular, tightening liquidity will lead to delays in premium collections as well as pressures on the recoverability of intermediary and inter-insurance receivables, leading to additional requirements for provisions and eventual write-offs impacting insurers’ profitability and capital.”
The leading P&C insurers in the GCC reported receivables equivalent to 117% of shareholders’ equity, as of end-2019, compared with an average of 68% for rated European P&C insurers.
While the level of GCC insurers’ receivables from policyholders was roughly in line with that reported by European insurers, receivables from (re)insurers and intermediaries were significantly higher at 72%, compared with just 27% for their European peers.
As liquidity tightens in the GCC, Moody’s expects receivables from policyholders to grow, while at the same time existing exposures will continue to deteriorate in quality, leading to increased provisions and write-offs.
The risk of rising levels of receivables is highest for insurers serving SMEs and corporate clients, as retail customers in the region tend to pay cash for their policies upfront.
Furthermore, any hit to profits for the region’s insurers will increase from the adoption of the IFRS 9 accounting standard that requires insurers to provide for possible future credit loss in the very first reporting period, including impairment losses on all receivables. M