By Santhosh V Perumal
Insurers in the Middle East in general and those in the Gulf countries have strong levels of risk-adjusted capital, although they continue to rely heavily on reinsurance protection and carry elevated levels of investment risk, according to AM Best, a rating agency for the insurance sector.
“Consequently, 78% of outlooks were stable as of November 30, 2014, and 8% were positive. This reflects companies operating with stronger and more diversified business profiles, while maintaining sound operating results,” the agency said in its report.
However, increased competition from new market entrants and regional insurers seeking to expand may create greater pressure on operating performance, it said.
Competition is growing as existing players look to expand outside their home countries or core domestic markets to other neighbouring territories, it added.
Further introduction of mandatory healthcare, which is currently the second largest line of business, will create opportunities for insurers. Nevertheless, prudent underwriting needs to be adopted for this underperforming risk.
In general, insurers and reinsurers in the region are developing their risk management capabilities, although for the industry as a whole, levels of risk management are fairly basic.
It said there are some notable exceptions where management teams employ sophisticated ERM (enterprise resource management) and risk modelling techniques.
These companies, however, remain a minority. Improvements in ERM that generate noticeable reductions in unwanted capital and earnings volatility could lead to positive rating momentum.
The performance of most new entrants is weak, reflecting the highly competitive operating environment. Many insurers are unable to create an adequate balance between market franchise and operating profitability. While the performance metrics of more established insurers are favourable, new company formations are struggling as Middle East markets are saturated with insurance capacity.
In comparison, the leading market participants enjoy strong underwriting performance and stable and improving market franchises. Market leaders tend to post excellent technical results, with combined ratios of less than 90%.
Finding that premium insurance retention remains low for primary insurers, emphasising the high dependence on reinsurance; it said “significant” inward reinsurance commissions drive technical performance for many insurance companies.
On a gross basis, the report said, non-life insurers’ portfolios are diversified, even as they are weighted towards motor and medical on a net basis, owing to significant cessions to reinsurers on high-limit corporate risks.
Retentions are increasing, but there is an ongoing reliance on reinsurers, particularly for large commercial and industrial risks. Material counterparty credit risk arises from low premium retention on corporate accounts, although this is mitigated through the use of a strong reinsurance panel.
A conservative underwriting approach produces stable technical results, although many insurers still have aggressive investment strategies. Investments are often concentrated in equity and real estate assets, which increase earnings volatility and liquidity risk.