Qatar growth prospects augur well for P/C insurance market

By Santhosh V Perumal/Business Reporter

Qatar’s economic growth prospects augur well for the property/casualty (P/C) insurance, which has grown 10%-15% annually, according to global credit rating agency Standard & Poor’s (S&P).

“We estimate real gross domestic product (GDP) growth of around 5% and GDP per capita of around $95,000 for the next two years (assuming oil prices remain high),” the agency said in a report.

Finding that the hydrocarbon sector dominates the economy and accounts for about 60% of GDP and 90% of exports, it said Qatar has made only modest progress in diversifying its economy.

Nevertheless, it expects projects related to Qatar’s national development strategy to improve the economy’s productive capacity and strengthen Qatar’s competitive position.

“This should create more opportunity for insurable activity, particularly for large, commercial projects such as internal rail links, Doha port, reservoirs and water treatment plants, industrial zones, and new stadiums and other facilities related to the 2022 FIFA World Cup,” the report said.

However, there is a risk that an investment agenda of this scale could weaken the government’s strong balance sheet, reduce the stability of the banking system, or significantly increase leverage in the corporate sector.

“We expect the country’s growth prospects will remain favourable for the Qatari P/C insurance sector. In our opinion, the market is highly competitive, particularly in commoditised lines such as motor and medical insurance, although product risk in these lines is low,” S&P said, highlighting that P/C insurance penetration was 0.9% of GDP in 2013.

Nevertheless, the agency expects profitability and growth prospects to remain favourable, particularly in the commercial lines as the level of insurable activity in Qatar increases.

Factoring in the historical and prospective profitability of the Qatari P/C insurance market as positive, S&P said based on its estimates, the sector’s five-year weighted-average return on equity (ROE) is approximately 13.6% and has historically been consistently above 12%.

Although the report did not find excessive risk-taking in the market, S&P, however, said there is some price competition on personal lines business, particularly motor and medical lines. The market is also strongly capitalised overall and most companies retain high shareholder equity on their balance sheets, which dilutes ROE.

Moreover, high investment income for some players that are heavily invested in local equity and property markets can further inflate returns and potentially mask poorer technical profitability, it said, adding “we expect ROE to gradually decline over the next two years through increasing margin pressure as new entrants force rates to fall and capital bases continue to increase year on year.”

S&P also considered that the level of regulatory oversight, though evolving under the Qatar Central Bank, is currently weaker than international standards and has little track record of market intervention and said barriers to entry are modest despite the dominance of five national companies which cover roughly 70%-75% of the market in premium terms.

The overall assessment of insurance industry and country risk is comparable to other regional P/C markets including those in Bahrain, Kuwait, and Saudi Arabia, S&P found.

However, it said the assessment of country risk is constrained as Qatar’s public institutions are in the early stages of development compared with other similarly rated sovereigns.

“In addition, we view monetary policy flexibility as limited because the exchange rate is fixed to the US dollar,” it said, adding “we consider high geopolitical risks in the Gulf region to be mitigated by strong international backing and substantial government and external assets.”

On barriers to entry, S&P said the market is heavily dependent on shareholder-tied business and the strength of broker/reinsurance relationships to provide capacity. “This can hinder the ability of new entrants to compete with established players and build sufficient scale to cover their costs,” it added.

The Qatar Financial Centre has allowed brokers to enter the market in the past three years (previously not allowed under the Ministry), which has become a vital distribution channel, particularly for more complex risks or where international capacity is required.