News Middle East28 Feb 2021

GCC:Insurers expected to enjoy underwriting profits in 2021, though results may weaken

| 28 Feb 2021

An increase in competition and resumption of nonessential medical treatment could cause claims to rise to more normal levels and, consequently, lead to weaker but still profitable underwriting results in 2021, according to a report by S&P Global Ratings.

In comparison, there were fewer claims in 2020, due to movement restrictions and COVID-19 pandemic-related claims not being covered under most insurance policies.

Another factor that could hit underwriting gains this year is a business interruption (BI) claims.

Mr Emir Mujkic, director - lead analyst, Insurance Ratings at ‎S&P says in the report “GCC Insurers In 2021 - Robust Capital Supports Credit Quality”, said, “While business interruption (BI) claims related to COVID-19 are typically not covered under property policies, we still anticipate higher-than-expected BI payouts in 2021 relating to claims in 2020, further affecting earnings.

Mr Mujkic also commented on other key risks that would have an impact on the financial performance of the GCC insurance industry this year. These included:

  • Investment losses

Mr Mujkic said, “Low returns on cash deposits have prompted some insurers to increase their exposure to equities or other high-risk assets.

Although financial markets recovered in the second half of 2020, a potential return of volatility in capital markets could weaken credit conditions for insurers in 2021, particularly if central banks gradually lift forbearance measures later this year.

  • Receivables

As for receivables, Mr Mujkic said, “We expect premium collections to remain slow as many businesses delay their payments in an attempt to survive. This will likely lead to an increase in receivables and write offs, putting further stress on liquidity, asset quality, and consequently credit conditions for insurers, in our view.”

  • Reinsurance capacity

Low reinsurance capacity in the region has led to strong rate increases and S&P expects this will continue in 2021.

“Although this will benefit reinsurers' top line and earnings, it could squeeze primary insurers' underwriting margins further. A potential shift to lower-rated or unrated reinsurers in search of lower rates could also increase credit risk,” Mr Mujkic said.

  • Slowdown in premium growth

Weaker economic activity has stoked competition, particularly in motor and medical lines, which together make up more than 60% of total non-life GWP in each market.

Mr Mujkic said, “Although we expect an economic recovery in 2021, due to higher oil prices and the rollout of the COVID-19 vaccine in the region, a decline in population and ongoing pressure in key sectors such as real estate, retail, and hospitality will hamper GWP growth. Lower consumer spending could also have short-term implications on demand for non-mandatory policies.”

Sovereign risk

The report also notes that weakening economic conditions and sovereigns' credit quality could further constrain insurers’ creditworthiness in countries with relatively lower sovereign ratings, such as Bahrain and Oman.


 

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