Dubai: Low oil prices are a headwind for the GCC insurance market in the short to medium term, as they hold back economic growth and weigh on government spending according to rating agency Moody’s.

While the industry is facing slowdown in underwritings, low growth environment is impacting the quality of investments on their books.

“Weak oil prices and high exposure to volatile investment assets are driving credit risk for GCC insurers. These factors are partly offset by the low insurance penetration across the region and improving insurance regulation,” says Mohammad Ali Londe, Assistant Vice President — Analyst at Moody’s.

Growth in GCC insurance premiums slowed to 14 per cent in 2015 year on year from 17 per cent in 2013, still far exceeding growth rates in advanced economies.

The risk, according to analysts is greatest for insurers in Oman, Bahrain and Saudi Arabia, reflecting those countries’ oil dependence and high break-even oil prices.

Asset quality continues to be a key credit weakness for many insurers in the region. “Low levels of GCC sovereign and corporate bond issuances limit insurers’ fixed income investment options, increasing their exposure to equity and real estate, leading to volatile investment returns. Investment risk tends to be lower in countries with more comprehensive regulatory regimes,” said Londe.

GCC markets face overcapacity and price competition. In most GCC countries, the top 5 to 10 insurers control a high share of the market, with a large number of smaller players competing for the remainder. As a result, the largest GCC insurers typically report good underwriting profitability, with combined ratios below 100 per cent, while profitability tends to be weak among smaller players.

“Price competition is generally intense across the main GCC insurance markets. Larger companies with higher risk bearing capacity tend to win larger commercial contracts and compete with smaller players for personal lines business.

Competition is exacerbated further by the narrow product mix, with motor and medical insurance dominating many of the GCC markets. As a result, loss ratios for medical and motor insurance are often high,” said Harshani Kotuwegedara, Associate Analyst at Moody’s.

In 2015, motor accounted for 30 per cent of the total portfolio in Saudi Arabia, while medical (including short-term life) accounted for a significant 52 per cent. In 2015, motor and life (short-term) & medical protection accounted for large shares of Kuwaiti premiums, at 28 per cent and 36 per cent respectively, while in Oman the corresponding figures were 37 per cent and 35 per cent. The product mix was more balanced in Bahrain, where insurers offer a broader range of life insurance products.

The region’s regulations are evolving and are at different stages of development in each jurisdiction. GCC regulators are moving towards risk-based capital requirements and actuarial reserving. “We view such measures positively since they support insurers’ credit quality, although their introduction may create short-term adjustment challenges,” said Londe.

Despite headwinds from low oil prices and invested asset volatility, the GCC insurance industry has considerable room for further growth due to the region’s low insurance penetration. Insurance penetration stands at 2.4 per cent and 2.5 per cent in UAE and Bahrain respectively, and is below 2 per cent in the other four GCC countries. This lags far behind advanced economies such as the US and the

UK, which had insurance penetration of 7.3 per cent and 10 per cent respectively in 2015.