Dubai: Insurance companies in the GCC are expected to face heightened challenges to their profitability and capialisation levels following COVID-19 outbreak and persistent fall in oil prices, according to rating agency Moody’s.
Moody’s has recently revised its assessment of the risks facing insurance companies in GCC countries to ‘high’ from ‘moderate’ over the next 12 to 18 months, as the coronavirus-induced economic downturn exacerbates pressure on the sector.
Lower premiums are expected to increase already intense competition in the GCC insurance markets.
“The coronavirus outbreak, coupled with the slump in oil prices, has weakened the economic outlook for GCC countries,” said Mohammed Ali Londe, an AVP analyst at Moody’s. “This will have adverse consequences for insurers, as demand for insurance falls.”
GCC insurers are facing multiple pressure points on profitability. Central bank interest rates cuts, combined with weaker equity markets and potential declines in real estate values are expected to weigh on investment income.
Economic slowdown and competition
The coronavirus outbreak is weighing on economic growth globally, compounded in the GCC region by falling oil prices. A slower economy will reduce the volume of insurable goods and activity, as reflected in the potential delay of the EXPO 2020 Dubai event by one year
Lower premiums will exacerbate already intense competition in the GCC insurance markets. Smaller players with weak liquidity buffers, and therefore more reliant on premium inflows, will further reduce pricing to secure inflows.
Insurers will also receive lower reinsurance commission income, a significant source of profit. This is because there will be less insurable commercial and projects business, which GCC insurers largely cede to reinsurers,Retail customers will opt for cheaper forms of compulsory cover, and reduce their purchases of non-compulsory cover.
“Lower premiums will exacerbate already intense competition in the GCC insurance markets. Smaller players with weak liquidity buffers, and therefore more reliant on premium inflows, will further reduce pricing to secure inflows,” said Londe.
Moody’s expects claims will also likely be higher due to an uptick in events and travel cancellations, albeit will remain manageable as the insurers’ net exposure is limited by reinsurance.
The current crisis will also likely increase delays in the recovery of insurance and reinsurance receivables, which GCC insurers hold in large volumes on their balance sheets, hence potentially further hitting their profitability and capital.
Equity market impact
Insurance companies in the region have varying, but often significant, exposure to equity markets. As equity markets have slumped, Moody’s expects insurers’ capital adequacy ratios to have deteriorated. Most exposed markets include Kuwait, Qatar and UAE.
GCC equity markets fell by as much as 35 per cent between year-end 2019 and late March, before partially recovering in response to government stimulus packages. As a result we expect insurers’ capital adequacy to have deteriorated.
The rating agency sees further pressure on the sector’s capitalisation could arise if real estate valuations go down, or if credit risk rises, which is likely if economic and market conditions do not improve in the next 18 months. Insurers with weak liquidity buffers will be more impacted as they may be forced to realise investment losses to pay claims.