Qatar's substantial fiscal headroom to absorb liquidity issues will buttress the insurance sector and the premiums are expected to rebound in 2021, supported by sovereign spending ahead of the 2022 FIFA World Cup, according to A M Best, a global insurance rating agency.
Highlighting that the blockade did not have a material impact on the insurance operations of carriers in the country; it said Qatar government had “material” fiscal headroom to absorb liquidity issues stemming from the embargo.
"This again will assist insurers as it insulates the economy from the potential economic damage associated with the Covid-19 pandemic," the rating agency said.
While the ultimate impact of the pandemic on the Gulf insurance market is unknown at the time of writing, it is expected to have a "materially negative" effect on most economies in the Gulf Co-operation Council (GCC) as well as global investment markets. The agency expects that this will, in turn, lead to pressure on insurers’ results and solvency.
In the past, Qatar’s economy has been resilient to strong economic headwinds. In June 2017, Saudi Arabia, the UAE, and Bahrain severed diplomatic relations with Qatar and imposed trade and travel sanctions.
Nonetheless, A M Best’s analysis found that the premiums are forecasted to decrease by 10.7% this year, followed by a rebound in 2021 to 12% supported by government spending in the preparation for the 2022 FIFA World Cup.
A M Best said the expectation is that the country’s large financial buffers and lower fiscal breakeven price per barrel would mitigate some of the damage to the economy caused by the lower oil prices.
The importance of oil prices and their relationship to public spending is "significant" as the GCC insurers have historically relied on sovereign spending – particularly on infrastructure projects – for premium growth.
Government-related engineering and property policies are considered highly profitable for the local insurers, which benefit from strong levels of inward reinsurance commission due to the extensive reinsurance participation on these policies, the report said.
"A delay to government-led infrastructure projects, as governments work to contain the spread of Covid-19 and cope with lower oil revenues, may not be material to net premium levels for the region’s insurers, but could have a significant impact on insurance profits," it said.
In an already fiercely competitive market, the reduction of insurable risk and consumer demand would exacerbate pricing pressure.
However, A M Best expects the price declines in some markets to be "tempered" by the regulatory-induced technical pricing of mandatory covers and the overall improvement in insurers’ underwriting discipline and pricing tools.
Highlighting a characteristic of Middle East insurers in taking more asset risk than they do insurance risk; it said among the GCC insurers it rates, the exposure to real estate and equities is 30% and 17% of total investments, respectively.
"These exposures are high, relative to investment portfolios of insurers in developed countries," it said, adding given this weighting, AM Best expects the GCC insurers to experience material balance sheet volatility in 2020.