Most of the insurers in the Gulf countries are likely to face moderate-to-high credit risk over the next 12-18 months, reflecting subdued economic growth on the back of weak oil prices and relatively high exposure to volatile investment assets, said a report.

These factors are partly offset by the low insurance penetration across the region, which will help drive continued growth, and improving insurance regulation, stated leading ratings agency Moody's.

The latter is a positive credit catalyst, but standards remain uneven across the region.

According to Moody's, low oil prices are a headwind for the GCC insurance market in the short to medium term, as they hold back economic growth and weigh on government spending.

Growth in GCC insurance premiums slowed to 14  in 2015 year on year (y-o-y) from 17 per cent in 2013, still far exceeding growth 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.

Moody's pointed out that asset quality continues to be a key credit weakness for many insurers in the region.

Low levels of GCC sovereign and corporate bond issuances limit insurers' fixed income investment options, increasing their exposure to equity and real estate, leading to volatile investment returns. Investment risk tends to be lower in countries with more comprehensive regulatory regimes, it stated.

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 reserving, said the ratings agency.

"We view such measures positively since they support insurers' credit quality, although their introduction may create short-term adjustment challenges," it noted.

Insurance penetration (the ratio of insurance premiums to GDP) is below 2 per cent in all but two of the six GCC countries.

"We therefore expect 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 (Formula 1, Expo 2020, Fifa 2022) are also supportive," stated the ratings agency.

In most GCC countries, the top 5 to 10 insurers control a high share of the market, with a large number of smaller players competing for the remainder.

As a result, the largest GCC insurers typically report good underwriting profitability, with combined
ratios (COR) below 100 per cent, while profitability tends to be weak among smaller players. This is prominent in Kuwait and Oman where profitability pressures is high.

Price competition is generally intense across the main GCC insurance markets. Larger companies with higher risk bearing capacity tend to win larger commercial contracts and compete with smaller players for personal lines business.

Competition is exacerbated further by the narrow product mix, with motor and medical insurance dominating many of the GCC markets.

As a result, loss ratios for medical and motor insurance are often high. For example, in 2015, motor accounted for 30 per cent of the total portfolio in Saudi Arabia, while medical (including short-term life) accounted for a significant 52 per cent.

In 2015, motor and life (short-term) & medical protection accounted for large shares of Kuwaiti premiums, at 28 per cent and 36 per cent respectively, while in Oman the corresponding figures were 37 per cent and 35 per cent.

According to Moody's, the product mix was more balanced in Bahrain, where insurers offer a broader range of life insurance products.

Motor insurance accounted for 28 per cent of this market, with health and life insurance (which includes long-term life products) accounting for 20 per cent each, it stated.

The quality of regulation also exerts a key influence on the profitability of GCC insurers. In markets with more comprehensive regulatory regimes, the introduction of actuarial reserving, as in Saudi Arabia, has supported technical pricing and profitability, said Moody's in its report.

This is reflected in our “low risk” assessments for this country's profitability profile. Despite headwinds from low oil prices and invested asset volatility, the GCC insurance industry has considerable room for further growth due to the region's low insurance penetration, it added.-TradeArabia News Service