The volatility in capital markets resulting from the COVID-19 pandemic and oil price shock could weaken the credit quality of some insurers in the Gulf Cooperation Council (GCC), said S&P Global Ratings in a report.
The report, titled ‘GCC insurers’ earnings are under threat from COVID-19 and low oil prices’, said it is still too early to assess the full financial impact that COVID-19 will have on the insurance sector in the GCC given that the situation is still evolving.
"Most insurers we rate in the GCC region benefit from robust capital buffers and should be able to absorb COVID-19-related claims and capital market volatility," said S&P Global Ratings credit analyst Emir Mujkic. "However, the significant fall in equity markets, widening bond spreads, and ongoing decline in real estate prices will damage earnings and capital buffers of insurers with material exposure to these asset classes."
The expected slowdown in premium collections, as many businesses try to delay their premium payments in an attempt to survive, could put further stress on liquidity, asset quality and, consequently, credit conditions for insurers over the coming months. "This could lead to some negative rating actions in 2020, particularly on insurers that have thin capital buffers," said Mr Mujkic.
Economies in the Gulf were also hit by a sharp decline in the oil price to near $25 a barrel in March, the lowest level in 17 years, from about $66 a barrel in early January. Lower oil prices will have a negative impact on many sovereigns, including on their balance of payments, fiscal revenues and GDP growth. As the situation evolves, “we will update our assumptions and estimates accordingly”, the report said.