GCC insurers to benefit from regulation offsetting economic headwinds

Premium growth improved in 2017 but is still below 2015 level

These negative factors are offset by forecast premium growth, thanks to compulsory medical cover and rising motor and property insurance prices in the region. Alex Atack for The National.

Arabian Gulf insurers face economic headwinds, but improving regulations will offset the negative impact from low-oil prices and high exposure to volatile investment assets, said Moody’s Investors Service.

"Asset quality continues to be a key credit weakness for many insurers in the region," said Mohammed Londe, an assistant vice president at Moody's. "Low levels of GCC sovereign and corporate bond issuance have historically limited insurers' fixed income investment options, increasing their exposure to volatile equities and illiquid real estate investments, making their investment returns more volatile."

These negative factors are offset by forecast premium growth, thanks to compulsory medical cover and rising motor and property insurance prices in the region, which will also benefit from high-profile events such as Expo 2020 in Dubai and 2022 World Cup in Qatar. Growth in GCC premiums is expected to have expanded 3.5 per cent in 2017 from 2016, but low compared to the 12.3 per cent rate achieved in 2015.

Gulf insurers are competing in a negative environment as economies slow down from low oil prices that started sliding in mid-2014. Despite low penetration rates, the GCC region’s insurance sector is hobbled by high reliance on investment income rather than premiums amid their exposure to volatile asset classes such as stocks and real estate.

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“Improving insurance regulation, as reflected in the introduction of risk-based capital and actuarial reserving requirements, is a further positive for the sector, although many smaller insurers are struggling with rising regulatory compliance costs,” Moody’s said.

The 30 listed insurers in the UAE which generate about half of the country's written premiums, face a challenging 2018 due to the introduction of VAT and lower oil prices after having a profitable 2017, rating agencies AM Best and S&P Global Ratings have said.

The net profit of listed insurers surged 45 per cent to Dh1.3 billion in 2017 compared with a year earlier, thanks to compulsory medical insurance, particularly in Dubai and the Unified Motor Insurance Policy.

Moody’s is bullish on the UAE insurance sector and expects consolidation to take place as new investors and existing shareholders funnel more capital into the sector, driving more mergers and acquisitions.

"We expect UAE insurers to maintain prices at their current higher level in 2018," said Mr Londe. "The higher prices, combined with the improvement of underwriting controls as part of a regulatory driven enhancement to risk management, will support profitability."