Insurers in the UAE will likely see a medium-term improvement in their credit profiles with thesector adjusting to financial regulations introduced in February 2015 as insurance premiums across the GCC are expected to keep growing at a double digit rate, despite weak oil prices, said Moody's Investors Service.
"UAE's new financial regulations should, in the medium term, underpin insurers' profitability as well as their capitalisation, asset quality and reserve adequacy," said Mohammed Ali Londe, assistant vice-president- analyst at Moody's.
"At the same time, price competition may ease as increased regulatory costs trigger industry consolidation and price hardening," Londe said in a report titled 'UAE - Insurance: Regulatory overhaul is credit positive despite short-term challenges' published on Tuesday.Across most GCC countries, insurers will likely face moderate-to-high credit risk over the next 12-18 months.
"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 insuranceregulation," said Londe.
In the UAE, industry consolidation is likely as a result of the new regulatory landscape. "Additional costs associated with the new regulations may prompt consolidation of smaller insurers, or encourage them to focus on business lines that yield adequate returns," he said.
Profitability for UAE insurers remains under short-term pressure as new actuarial reserve-setting and reporting requirements will drive continued technical reserve strengthening in 2016 and 2017. Over the medium term,however, stricter reserving requirements will likely encourage adequate premium rate-setting market-wide, supporting profitability.
Asset quality will also likely improve for insurers as the new rules will over time limit insurers' traditionally high exposure to riskier assets such as equities and property.
In addition, Moody's expects solvency to improve overall as the regulations set capital requirements tailored to the specific risks borne by each company.Moody's said low oil prices are a headwind for the GCC insurance market in the short to medium term, as they slow economic growth and weigh on government spending. Growth in GCC insurance premiums slowed to 14 per cent in 2015 year on year from 17per cent in 2013 year-on-year, still far exceedinggrowth rates in advanced economies. The risk is greatest for insurers in Oman, Bahrain and Saudi Arabia, reflecting those countries' oil dependence and high break-even oil prices.
The rating agency considers asset quality to be a key credit weakness for many insurers in the region. Infrequent bond issuance by GCC sovereigns and corporates limit insurers' fixed income investment options,increasing their exposure to equity and real estate which leads to volatile investment returns. Investment risk tends to be lower in countries with more comprehensive regulatory regimes.
Moody's said insurance regulation is a positive credit catalyst, but standards remain uneven across the region. 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-led reserving. Moody's views such measures positively, as they support insurers' credit quality, although their introduction may createshort-term adjustment challenges.
The insurance market's low penetration supports premium growth. Insurance penetration (the ratio of insurance premiums to GDP) is below two per cent in most GCC countries. Moody's therefore expects insurance premiums to keep growing at a double digit rate, despite weak oil prices. The advent of compulsory medical coverage in some countries, and several global sporting and cultural events due to take place in the region - such as Expo 2020 and Fifa 2022 - are also supportive.-
Issac John Associate Business Editor of Khaleej Times, is a well-connected Indian journalist and an economic and financial commentator. He has been in the UAE's mainstream journalism for 35 years, including 23 years with Khaleej Times. A post-graduate in English and graduate in economics, he has won over two dozen awards. Acclaimed for his authentic and insightful analysis of global and regional businesses and economic trends, he is respected for his astute understanding of the local business scene.
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