Dubai: A number of GCC insurers are expected to face pressure on earnings this year due to mounting competition, more volatile investment returns, higher regulatory costs, and stricter accounting standards according to rating agency Standard & Poor’s.

S&P’s comments come a day ahead of the third Dubai World Insurance Congress (DWIC) that will host both regional and global insurance and re-insurance leaders in Dubai on February 27 and 28, 2019.

The rating agency expects gross written premiums (GWP) in most GCC markets to stay sluggish, due to the lack of new mandatory insurance coverage and difficult economic conditions.

“Although the GCC’s six insurance markets should remain profitable, we anticipate a decline for some of them this year. GCC economies have slowed over the past two years, due to fewer government-led projects resulting from lower oil prices,” said Emir Mujkic, a credit analyst with S&P.

Regional insurers are expected to find going tough this year because of increasing competition in the region’s overcrowded insurance markets, higher operating costs, and lower investment results due to volatile equity markets and falling real estate prices. Added to this is the need to increase provisions amid tighter regulation and standards. Under the new accounting standard (IFRS 9), insurers are now required to apply a more forward-looking approach to provisioning for credit losses, which will increase such provisions on initial adoption.

S&P took negative rating actions on nearly every sixth insurer they rate in the GCC in 2018, mainly because of weak earnings, rising risk exposure, and/or weaknesses in governance arrangements. About 30 per cent of its ratings still carry negative outlooks, indicating the possibility of further downgrades in 2019.

Countrywise, net profit trends across the GCC in 2019 indicate, with the exception of Saudi Arabia, all others are expected to show either negative or flat growth. In the UAE, while the GWP is expected to remain flat, aggregate net profits are projected to decline. In Qatar and Bahrain too profitability is seen declining while Kuwait and Oman are expected to show flat growth.

UAE outlook

In 2018, year-on-year GWP growth in the UAE slowed to less than 1 per cent from about 12 per cent in 2017, when minimum motor insurance rates and mandatory medical cover for lower income residents in Dubai led to strong growth of premium volumes and profitability. The decline resulted mainly from weaker consumer spending after the introduction of value-added tax (VAT), cost-cutting of corporates, no new mandatory insurance covers, and reduced rates for some medical and motor business.

Despite some positive trends in the UAE’s insurance sector stemming from an increase in infrastructure spending in Abu Dhabi following the adoption of a Dh50 billion multi-year stimulus package, investments in Dubai in the run-up to Expo 2020 and a new labour insurance system to replace bank guarantees for workers could also lead to higher premium volumes, S&P analysts believe none of these are able to 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 the UAE in 2018.

Strong capital adequacy

GCC insurers are relatively better capitalised than their counterparts across the Middle East and North Africa region, however, the companies are susceptible to declines if they’ve experienced strong growth in GWP, asset risk exposure, or large underwriting or investment losses, according to S&P.

“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. While Western European insurers’ high-risk assets represented about 27 per cent of their total capital (after adjustments) in 2018, for GCC insurers the proportion was 66 per cent,” Emir Mujkic, a credit analyst with S&P.

The capital bases of most insurers in the Gulf are highly exposed to asset volatility. A combination of weak investment results and poor underwriting results could heighten capital risk.