Dubai: GCC insurers are expected to face decline in profits this year due higher provisioning, according to rating agency Moody’s.
“Insurers in the GCC countries are more exposed than their European peers to the risk of recoverability of their receivables over the next 12-18 months, as their counterparties’ liquidity tightens across the region. This will lead to increased provisioning, exacerbating pressure on profitability and, in some cases, on capital,” said Mohammed Ali Londe, a Vice President - Senior Analyst at Moody’s in Dubai.
According to Moody’s, at year-end 2019, the leading property and casualty (P&C) insurers from each GCC country reported receivables (i.e. sums that are owed to them) equivalent to 117% of shareholders’ equity, far exceeding the 68 per cent average for rated European P&C insurers. GCC insurers’ receivables from (re)insurers and intermediaries were also significantly higher at 72 per cent compared with just 27% for their European peers.
“As liquidity tightens in the GCC region, we expect receivables from policyholders to grow, while at the same time existing exposures continue to deteriorate in quality, leading to increased provisions and write-offs. This risk is more pronounced for insurers serving small and medium sized enterprises (SMEs) and corporate clients, as retail customers pay cash upfront,” said Londe.
While receivables from reinsurers mostly include exposures to some highly rated counterparties, GCC insurers also have exposure to some non-investment grade and unrated names. Furthermore, significant intermediary and inter-insurance balances remain unreconciled and unsettled. As liquidity tightens globally, the rating agency expects to see further pressures on these receivables, leading to additional requirements for provisions, which would weaken profitability and capital.
Tighter reporting standards
The raging agency expects the profits for regional insurers to come under further pressure from the adoption of IFRS 9, which requires insurers to provide for possible future credit loss in the very first reporting period, including impairment losses on all receivables.
Moody’s expects the risk of recoverability of reinsurance counterparty balances to remain subdued in the next couple of years as actual reinsurance receivable write-offs may not be realised even if there is some short-term volatility through accounting provisions for the recoverability of these balances.
A more lasting negative impact for GCC insurers will result from the significant intermediary and inter-insurance balances that remain unreconciled and unsettled. These receivables are also at risk because liquidity has tightened globally.
While the region’s leading investment-grade rated insurers, which have sophisticated risk management, enjoy significant liquidity buffers, Moody’s said the risk is most elevated for the region’s smaller players with weak liquidity buffers and which are therefore more reliant on premium inflows and collections.
The higher risk of weakness in liquidity and profitability impacting insurers’ capital comes at a time when regulators have implemented risk-based capital measures in the region that is expected accelerate the pressure on the market to consolidate through M&A and runoffs.