Low interest rates and increasing competition for market share are testing insurers and reinsurers in Gulf Cooperation Council (GCC) countries, says Standard & Poor's Ratings Services in a report published on Tuesday titled "Exploring The Credit Characteristics Of GCC (Re)Insurers."
Nevertheless, S&P contends that the industry remains on a stable footing, supported primarily by (re)insurers' very strong capital adequacy and generally adequate competitive positions.
"One of the GCC (re)insurance sector's key strengths is its capital position, reflected in our average assessment of very strong capital adequacy," said Standard & Poor's credit analyst Ali Karakuyu.
"Indeed, 20 of the 34 (re)insurers we rate in the region have their risk-based capital assessed as extremely strong--that is, at the 'AAA' level."
“We assess many Gulf (re)insurers' competitive positions as adequate (in the case of 18 companies), although the range includes six companies that we consider have strong positions and 10 that we see as less than adequate. Typically, those with strong competitive positions have leading positions in one or two markets, which enables them to post strong underwriting performance,” it said.
Unlike rated European (re)insurers, GCC-based companies are generally limited in terms of geographic diversity.
This is because for a non-domestic company, it's generally difficult to break through into profitable lines that are repeatedly renewed by established local players. “Over the past few years we've seen a number of GCC insurance companies starting up takaful operations, notably in Kuwait and Bahrain, but note that they've found it difficult to avoid underwriting the fiercely competitive compulsory retail lines, such as medical and motor insurance, at a loss.”
GCC (re)insurers' exposure to asset risk is much higher than underwriting exposure, by contrast with their European peers. This is partly a reflection of the fact that some companies have chosen not to distribute their profits. Rather, they choose to increase their asset base for investment activities. “In our view, companies' capital is exposed to high asset risks, including equities and real estate. This partly reflects the limited investment options available and the underdeveloped capital markets in the GCC region. Some companies are dominated by shareholders that have higher risk appetites for their investment activities than for their underwriting, reflecting their wider interests outside the insurance business,” S&P report said.
The average ratio for high-risk assets to total adjusted capital is 57%, with some outliers reaching 100% or well above it. Although the Middle Eastern capital markets are growing fast, they are still relatively narrow and are heavily dependent on their respective domestic economies. Most companies tend to have high exposure to the financial services or real estate sectors, which on average account for about 45% of total invested assets.
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