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Although 2019 is likely to be another year of modest growth for insurers, the six GCC insurance markets should remain profitable. The main factors that will challenge earnings are increasing competition in the region’s overcrowded insurance markets, stricter accounting standards, higher operating costs, and lower investment results due to volatile equity markets and falling real estate prices.

Additionally, increasing provisions and tighter regulation standards will put some insurers under pressure, and under the new accounting standard (IFRS 9), they are now required to apply a more forward-looking approach to provisioning for credit losses, which will increase such provisions on initial adoption.

In the past two years, premium growth in GCC economies has slowed down, due to fewer government-led projects and job cuts in some sectors as a result of lower oil prices. A modest pickup in GDP growth across the region this year, however, will not necessarily translate into stronger gross written premiums (GWP) growth, since lacklustre consumer spending and the need of corporations to cut costs will continue.

Although most insurance companies in the region are well capitalised, these pressures could weaken their capital buffers and/or expose governance issues at some small and mid-size insurers. Smaller players in the market will have to improve their profitability and update their control and governance frameworks to reduce risks from a further weakening of credit conditions.

According to our risk-based model, most insurers showed healthy capital levels, which is a key rating strength. Capitalisation in the GCC insurance market is stronger than that of its peers in many markets in Europe and other emerging markets the Middle East and Africa. The relatively small size of many insurers in the Gulf makes their capitalisation levels susceptible to decline if they’ve experienced strong growth in GWP, asset risk exposure, or large underwriting or investment losses.

We have also seen that GCC insurers tend to invest a significant portion of their assets in equities, real estate, or unrated bonds, which we consider to be high-risk assets. The capital bases of most insurers in the Gulf are highly exposed to asset volatility, which often weighs on our ratings in the sector.

Following years of double-digit year-on-year GWP growth, most of the GCC insurance markets are now experiencing a relative lull because of weaker economic conditions and the absence of new mandatory coverage. However, longer-term growth prospects remain satisfactory, since the percentage of premiums to GDP of 1.5-3.5 per cent in most GCC markets is still relatively low compared to other developing markets.

In the UAE, a key driver for premium growth in 2019 will be an increase in infrastructure spending in Abu Dhabi following the adoption of Dh50 billion multi-year stimulus package, and investments in Dubai in the run up to Expo 2020. A new labour insurance system to replace bank guarantees workers could also lead to higher premium volumes for a small number of companies participating in this scheme of up to Dh400 million.

However, these initiatives alone cannot offset the effects of intensifying competition in motor and medical lines, which together contributed to more than 70 per cent of total non-life premiums in 2018.

Looking to the future, in our opinion, the consolidation of GCC insurers would help improve their operational scale and increase the capital base of individual companies, allowing them to retain more risk and easing the highly competitive market conditions. However, regulatory incentives will be required to kick-start M&A activity, for example, a requirement to increase capital bases and improve service levels.

Emir Mujkic is S&P Global Ratings’ Director of Financial Services, Insurance Ratings.