GCC insurers' gross premiums will grow; but volatility may hit profit
17 Mar 2017 - 21:20
By Satish Kanady / The Peninsula
Credit conditions for rated insurers in the four largest Gulf Cooperation Council (GCC) markets by gross premiums will remain broadly stable in 2017. This is despite the current economic slowdown in the GCC region, which is the result of relatively low oil and gas prices, as these contribute heavily to government budgets. The four GCC markets are Saudi Arabia, the United Arab Emirates (UAE), Qatar, and Kuwait, according to the ratings agency S&P Global.
"We forecast that gross premiums in the four largest GCC insurance markets will continue to increase in 2017, by around 30 percent in Kuwait, and by up to 10 percnet in the other three markets," said S&P Global Ratings analyst Emir Mujkic.
"Our growth assumptions are based on the planned privatization of medical insurance schemes and ongoing government spending on infrastructure projects, which will lead to a larger number of insurable risks."
Premium growth will exceed our expectations for real GDP growth in the four largest GCC insurance markets in 2017. We forecast that GDP growth will range between 1.5 percent for Kuwait and about 3.5 percent for Qatar.
The four largest insurance markets in the GCC are likely to remain profitable in 2017. However, there is a risk that, in addition to further reserving requirements following the adoption of new regulations in the UAE, the enforcement of mandatory insurance cover in Saudi Arabia, and the privatisation of medical insurance in Qatar and Kuwait, could strain insurers' technical performance, as they lack sufficient data to price the new business appropriately. We therefore see some potential risks to profitability in the short term.
Fierce competition will continue to increase the gap between large and small insurers, as greater size helps insurers to mitigate high fixed costs and increase their competitiveness. In our opinion, with the help of regulators, this widening gap could prompt the start of industry consolidation over the next one or two years, particularly in Saudi Arabia, and to a lesser extent in the UAE, in a bid to reduce the number of small and loss-making insurers.
In a separate report , the ratings agency noted GCC countires have started to look much more critically at their expenditures . When oil prices were at their peak, revenues from hydrocarbon products enabled governments in the GCC region to generate fiscal surpluses while spending heavily on infrastructure development. Oil prices were above $100 per barrel for significant parts of 2011-2014, supporting this government spending and creating insurable activity that benefited both insurers and reinsurers.
However, prices peaked in June 2014 and the picture has since changed markedly. S&P forecast that Brent crude oil prices will average $50 per barrel in 2017 and 2018, and $55 per barrel in 2019.