Persistent low oil prices may dampen GCC insurance growth, says A M Best
March 30 2016 12:58 AM
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By Santhosh V Perumal/Business Reporter

A persistent low oil price environment may dampen insurance growth in the Gulf Cooperation Council (GCC) and stress their earnings, according to A M Best, a global insurance rating agency.
“Looking ahead, should the environment of low oil prices persist, it may put a dampener on insurance growth and pressure earnings,” the rating agency said.
The impact of these testing market conditions is unlikely to result in a sudden deterioration in market performance and as such, will enable (the GCC) insurers to adapt their strategies as necessary, it said in a report.
Finding that its rated insurers across the GCC region have good balance sheet strength, A M Best said this should enable them to absorb market deficiencies, at least over the short-to-medium term.
The rating agency notes that given the exposure most local insurers have to equity and real estate assets, it is highly conceivable that investment markets, and consequently the non-technical performance of these insurers, may be further impacted.
With the expectation that economic indicators are set to weaken, a fall in investor confidence may lead to deterioration or fluctuations in asset values, it said, adding however, this impact is not expected to be as severe as that experienced over the last few years.
Domestic insurers in the region often only have profiles and balance sheets that support them taking a small net share on large property and engineering risks, according to A M Best.
Nevertheless they have benefited from strong inward commissions from regional and global reinsurers that bear the majority of these risks, and profitability over the last five years has been buoyed by these commissions, it said.
“Consequently, whilst a slowdown in new energy, property and construction risks may not impact the net written premium base of most domestic insurers, technical profitability may be subject to deterioration,” it said.
High oil prices, combined with stable global demand in the years leading up to 2014, supported significant government expenditure by the GCC countries. There was widespread regional benefit and this prosperity spread across multiple sectors, including energy, finance, tourism and construction, it found.
Finding that some GCC countries have entered the next phase of growth, diversifying their economies away from a dependence on oil and gas; A M Best said the UAE stands out, with Dubai developing as an international tourism, trade and finance hub, and Abu Dhabi emerging as a centre for renewable energy.
“Qatar is also less susceptible as it is one of the world’s largest exporters of liquid natural gas, prices of which have not fallen as much as oil over the past year. As a consequence, the UAE and Qatar are perceived to have the greatest level of long-term economic stability in the region,” it said.
Individuals and companies from across the region are more likely to find these markets attractive for investment, given that prospects for future growth are deemed stronger.
Other markets retain a higher level of dependence on oil and gas revenues and are therefore more vulnerable, it said, highlighting that some countries, including Saudi Arabia — the world’s biggest oil producer — are running existing budgets on accrued cash reserves, a “clearly unsustainable approach over the medium term.”
Additionally, for those GCC countries that have not accrued the same level of surpluses, such as Bahrain and Oman, the negative impact of low hydrocarbon prices is even more immediate, it added.



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