Finding that the Middle East and North Africa region is accustomed to political and economic turbulence, with periodic conflicts, the report, however, said the GCC (Gulf Co-operation Council) itself has historically remained relatively calm.
Nevertheless, geopolitical tensions were elevated to new levels in 2017 when Saudi Arabia, the UAE and Bahrain severed diplomatic relations with Qatar and imposed trade and travel sanctions, A M Best said, adding to date, these actions have not had a material impact on the insurance operations of carriers in the region, although investment markets have seen volatility.
“Over the short term, A M Best expects a limited impact on the credit quality of Qatari insurers,” it said.
Highlighting that pricing pressure has been alleviated partially in markets such as Saudi Arabia and the UAE, driven by regulation mandating actuarial pricing and the introduction of uniform policy guidelines; it said similar trends are expected in Qatar. Regulatory requirements in Saudi Arabia, the UAE and Qatar have encouraged insurers to implement robust governance and risk management frameworks, which include actuarial pricing and reserving for motor and medical lines of business, enhanced capital management, increased management control on investments, and a rationalisation of dividend policies.
The Gulf insurers’ balance sheet is generally well capitalised but “vulnerable” to investment market shocks, particularly in the face of heightened economic and political uncertainty, it said.
Risk management advances and improved regulatory sophistication partially mitigate the GCC insurers’ challenges including persistent low hydrocarbon prices (and the resultant pressure on public spending), the introduction of value added tax, political tensions and trade embargoes, and the unrelenting level of price competition, the A M Best report said.
Highlighting that GCC insurers have historically relied on government spending for premium growth – particularly for infrastructure projects; it said with hydrocarbon prices trading below fiscal breakeven levels, governments have been reconsidering their economic policies, as demonstrated by increasing spending restraint.
“Overall, the impact on premium growth for the GCC market has been somewhat limited; however, capital levels have been exposed to volatility from fluctuating asset prices as a result of low oil prices,” A M Best said, adding should economic uncertainty regarding long-term oil prices continue, investment return volatility is expected to linger.
Government-related engineering and property policies are considered highly profitable, benefiting from heavy reinsurance participation and strong levels of inwards reinsurance commission, it said.
“A contraction in premiums derived from these policies, whilst not material to the net premium levels for insurance companies, could potentially put insurance profits under pressure,” A M Best cautioned. It said there have also been minor premium collection issues in connection with government-related policies.
Despite this, it expects insurance penetration to increase in GCC countries, primarily stemming from further roll-outs of mandatory health insurance programmes, it said.
Mergers and acquisition activity was a common theme throughout the GCC in 2017, with several transactions in Bahrain, Saudi Arabia and the UAE but despite this consolidation, the number of market participants continue to be excessive, relative to the level of premium volumes generated, it found.
“Despite this, competition remains cut-throat, with companies continuing to prioritise top line growth over bottom line profitability,” it said.
