Regulatory changes to boost UAE insurers, says Moody’s

The profitability and credit profiles of UAE insurers are forecast to improve as the sector continues to reshape itself following regulatory changes two years ago, credit agency Moody’s said on Tuesday.

In February 2015 the Insurance Authority introduced rules placing restrictions on how companies invest their money and how much exposure they could have in a particular asset class.

The rules also required insurers to have an independent investment committee as well as a series of changes that strengthen corporate governance, compliance and risk management.

“The UAE’s new financial regulations should, in the medium term, underpin insurers’ profitability as well as their capitalisation, asset quality and reserve adequacy,” Mohammed Ali Londe, the assistant vice president at Moody’s, said in the report. “At the same time, price competition may ease as increased regulatory costs trigger industry consolidation and price hardening.”

With more than 60 insurance companies competing in a country with a population of 9 million, the sector has suffered over the years from price wars and poor investments, despite low penetration rates.

The ratings agency AM Best also expects the credit profile of the country’s 29 listed insurers to improve after they returned to the black last year. The listed insurers posted a cumulative profit of Dh885 million last year compared with a loss of Dh145m a year earlier, according to AM Best.

“Profitability for UAE insurers remains under short-term pressure as new actuarial reserve-setting and reporting requirements will drive continued technical reserve strengthening in 2016 and 2017,” Moody’s said. “Over the medium term, however, stricter reserving requirements will likely encourage adequate premium rate setting market-wide, supporting profitability.”

The improvement in profitability comes on the back of an increase in gross written premiums, which grew 8 per cent to about Dh40 billion last year from Dh37bn in 2015 and are forecast to reach Dh60bn by 2020, with an annual growth rate of about 10 per cent, according to the Insurance Authority.

Moody’s expects consolidation among the UAE’s insurers because of the new regulatory changes, while asset quality will improve as insurers limit their exposure to risky assets such as equities and property.

In the wider Arabian Gulf, the insurance sector will be shaped by low oil prices and regulation, and will face moderate to high credit risk over the next 12 to 18 months, Moody’s said.

“Weak oil prices and high exposure to volatile investment assets are driving credit risk for GCC insurers,” Mr Londe said. “These factors are partly offset by the low insurance penetration across the region and improving insurance regulation.”

Gulf insurance premiums grew at a slower pace in 2015, rising 14 per cent year-on-year, compared with a 17 per cent year-on-year growth rate in 2013. The biggest risks are concentrated in Oman, Bahrain and Saudi Arabia owing to their reliance on oil.

Insurance penetration, which is below 2 per cent in the Gulf, will help to drive growth in premiums.

“Moody’s therefore expects insurance premiums to keep growing at a double-digit rate, despite weak oil prices,” the agency said. “The advent of compulsory medical coverage in some countries, and several global sporting and cultural events due to take place in the region, such as Expo 2020 and Fifa 2022, are also supportive.”

Asset quality is a potential weakness because of insurers’ exposure to risky assets such as equities and property, while regulatory changes are supporting credit improvement, although standards across the region remain uneven.

“GCC regulators are moving towards risk-based capital requirements and actuarial-led reserving,” said the ratings agency. “Moody’s views such measures positively, as they support insurers’ credit quality, although their introduction may create short-term adjustment challenges.”

Follow The National's Business section on Twitter