Best maintains negative outlook on Gulf Cooperation Council markets

Covid-19-driven uncertainty and the risk that further oil price volatility will maintain economic pressure across the region, together with concerns over price adequacy amid intensely competitive conditions, are behind AM Best’s decision to continue to hold a negative market segment outlook on the insurance markets of the Gulf Cooperation Council (GCC). The GCC comprises Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE). Other factors behind the negative outlook include financial market fluctuations and depressed real estate valuations, as well as the expectation of liquidity pressures and increased delays in cash collection. These factors are partially offset by tightening regulatory oversight and control, and easing regional geopolitical tensions. According to Best, insurance companies within the GCC will continue to feel the effects of the economic fallout of the pandemic throughout 2021. It noted that historically, many GCC insurers have relied on government spending – notably on infrastructure projects – for a sizeable share of premium growth. Should government spending in the region be challenged by weaker fiscal revenues, insurers are likely to see a reduction in these highly profitable growth opportunities over the near term. Best believes that a “perfect storm for lingering pricing pressure” may be looming on the horizon for the region’s insurers. The GCC insurance markets are fiercely competitive and premium rate adequacy has been a concern for some time, said Best. It noted that certain regulators have taken steps to support price adequacy in recent years. For example, Saudi Arabia implemented technical pricing requirements and the authorities in the UAE introduced minimum tariffs on highly competitive classes of business, including motor business. In addition to increasingly competitive pricing conditions across the region, there have been reports of further discounts applied to premium tariffs, said Best, and price competition is especially evident in the region’s motor and medical classes. Best noted the development of more robust regulatory frameworks in all GCC markets, although regulatory standards vary across the region. It pointed in particular to the recent introduction of more stringent regulatory requirements in countries such as Saudi Arabia, the UAE and Qatar, which have prompted companies in these markets to implement more robust risk management and governance frameworks. Kuwait, which Best said is historically viewed as having underdeveloped insurance regulation, has begun to take steps to enhance supervision of insurers with the introduction of a new insurance law (Law No. 125 of 2019 on the Regulation of Insurers). Best said it views the region as having consolidation potential, particularly as subdued premium opportunities increase competitive pressures on underwriting margins. Insurance markets across the GCC are fragmented and highly competitive, and a vast number of insurers operate in each market, competing for limited available insurance premiums. “In AM Best’s view, further consolidation would be positive for insurance markets of the GCC, helping to improve market profitability, reduce pricing competition, drive operational efficiencies from scale economies and provide inorganic growth opportunities. However, extensive M&A activity sufficient to alter the competitive landscape may only follow regulatory intervention, for example from the imposition of increased minimum capital requirements, such as have been discussed in Saudi Arabia,” it said. Best concluded: “Insurers in the region are generally well capitalised and have demonstrated their ability thus far to absorb pandemic- and oil price-driven asset shocks. However, with uncertainty set to persist through 2021, testing conditions will continue to leave carriers exposed to capital volatility and shrinking profit margins.”

Best maintains negative outlook on Gulf Cooperation Council markets

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