GCC insurers’ risk increases as coronavirus impact, oil slump exacerbate pressure on sector

Moody’s Investors Service has revised its assessment of the risks facing insurance companies in Gulf Cooperation Council (GCC) countries to “high” from “moderate” over the next 12 to 18 months, as the coronavirus-induced economic downturn exacerbates pressure on the sector.

Lower premiums will increase already intense competition in the GCC insurance markets, as smaller players that are more reliant on premium inflows due to weak liquidity buffers, will further reduce pricing to secure inflows.

“The coronavirus outbreak, coupled with the slump in oil prices, has weakened the economic outlook for GCC countries,” said Mohammed Ali Londe, an AVP analyst at Moody’s Investors Service. “This will have adverse consequences for insurers, as demand for insurance falls.”

GCC insurers are facing multiple pressure points on profitability. Central bank interest rates cuts,combined with weaker equity markets and potential declines in real estate values will weigh on investment income. Claims will also likely be higher due to an uptick in events and travel cancellations, albeit will remain manageable as the insurers’ net exposure is limited by reinsurance.

Insurance companies in the region have varying, but often significant, exposure to equities. As equity markets have slumped, Moody’s expects insurers’ capital adequacy ratios to have deteriorated. If real estate valuations fall, capitalisation levels could be further pressured.

The current crisis will also likely increase delays in the recovery of insurance and reinsurance receivables, which GCC insurers hold in large volumes on their balance sheets, hence potentially further hitting their profitability and capital.

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