Strong capital buffers protect Gulf insurance firms against pandemic claims

Strong capital buffers have helped GCC insurers avoid negative credit rating action during the coronavirus pandemic, and the sector has proved to be more resilient than some other sectors in the region, analysts said.
However, they warned that regional insurers have big exposure to equity and real estate markets, which could impact their profitability.
"There has not been any Covid-19 or oil price related rating actions on local insurers so far, which is a good news," said Emir Mujkic, director and lead analyst for insurance ratings at S&P Global Ratings.
"Nevertheless, we have seen some rating actions on insurers in the region in the first part of the year because of company-specific reasons. Those could include governance, spending efficiency, weakening of liquidity buffers and so on. All in all, it is safe to say that ratings on GCC insurers have been more resilient when compared to other sectors in the region," Mujkic explained while addressing a webinar.
Ali Karakuyu, director and lead analyst for insurance ratings at S&P Global Ratings, said insurance sector has entered this pandemic with a robust level of capitalisation when compared to 2008 financial crisis.
However, Mujkic warned that a second waive could eat into GCC insurers capital buffers and lead to some negative rating actions in 2020-21.
"Just looking at the insurance ratings, it is safe to say that they are relatively strong. However, 20 per cent of outlook is negative so suggesting that there could be rating action over the next one to two years. One of the key reasons why the ratings in the region are relatively strong is because roughly 90 per cent insurers maintain capital buffer which are equivalent to AAA or AA confidence level. Only 10 per cent of insurers that we rate in the region have capital buffers that have BBB or below capital base model," added Mujkic.
He added that insurers here have been fortunate because underwriting losses have been relatively low so far.
"Medical and motors claims have declined significantly during lockdown period, mortality rate in the Gulf have relatively been low so far which mean impact on the life insurers has been low. Claims for other non-life insurance lines such as business interruptions seem to be modest at this point of time," said S&P analyst.
Hatim Maskawala, managing director, Badri Management Consultancy, said the UAE and Saudi insurers will see impact of Covid-19 crisis on corporate results in second half of 2020.
He noted that aggregators will also play a key role because consumers are able to compare prices of all the channels very transparently which forces insurance companies to sell at times on loss making prices.
"In the first half, because of lockdown, motor fees claims went down drastically but at the same time cash flow of companies also dried down. There has been a price competition on motor side which has seen the price reduced which will have an impact in the second half of 2020 and 2021 when things are coming back to normal. At the same time, there is a tendency of less number of people going out, hence, there are lesser number of cars on the roads. The price competition will eat away some of the profits of the companies," said Maskawala.
On the medical side, he said it is critical is how the governments handle the Covid-19 payments.
"If firms offer lowest priced policy amongst the competition, then these lowest premiums mean firms will most probably end up making losses. That is the challenge being faced by insurance companies. In Dubai, Covid-19 medical claims are born by companies while in Abu Dhabi, government is paying for Covid-19. So Dubai portfolio companies have relatively higher loss ratio compared to companies having Abu Dhabi-based portfolio for medical insurance," added Maskawala.
Investment exposure
GCC insurers have a high exposure to equities and real estate which are considered high risk assets while capital adequacy of many GCC has weakened over the last couple of months.
"All equity markets in the region are still in loss zone despite some recovery in second quarter. Real estate prices in Dubai have declined by11 per cent in H1 and are expected to see further decline. Companies have significant exposure to equity or property and other high risk assets. Hence, they would obviously see weaker earnings in first half. If situation continues, that may be the case for the second part of the year," he added.
S&P analysts see GCC insurers reporting solid underwriting results in first half of 2020 due to motor and medical claims decline which will make up about 60 per cent or more of total business in some regional markets. Those underwriting will help offset weaker results for their full year earnings to see how equity market continue to develop.
- waheedabbas@khaleejtimes.com