Insurers brace for tough times in UAE and across GCC

Insurers in the UAE and other Gulf countries are well-capitalised but demand for insurance will decline this year due to a delay in the rollout of mandatory health insurance in Oman and Bahrain, postponement of Expo Dubai and a delay in infrastructure projects because of the coronavirus outbreak, according to analysts.

Credit ratings agency AM Best has projected that premiums in the GCC will contract in all the countries this year but will make some recovery in 2021 and they are capable of enduring a stress scenario. However, the real impact of Covid-19 is expected to be realised in the second quarter of 2020.

Jessica Botelho Young, senior financial analyst at AM Best, said premiums growth in the UAE was expected to be modest in 2020 due to short-term growth opportunities associated with Expo.

"Since the Covid-19 pandemic, economic forecasts have been revised downwards and premiums are now expected to contract by 6.1 per cent, further intensifying pricing pressure," she said.

Young noted that insurers in Dubai will face additional pressures on their bottom lines stemming from their medical books.

AM Best noted that majority of medical policies across the market contain explicit exclusions from losses arising as a result of a pandemic.

"To date, the number of [Covid-19] cases in Dubai has been manageable and insurers are expected to be able to absorb these losses. However, if there is a material increase in the number of cases, the corresponding increase in claims costs will negative affect insurers' profitability, particularly if reinsurers are not contractually obligated to cover these losses," Young said.

"GCC insurance markets will feel the effect of lower oil prices and a Covid-19-driven reduction in economic activity on both underwriting and assets. Most countries in the region remain heavily reliant on oil revenue, although some - such as the UAE Saudi Arabia - are less reliant than others. Any fluctuation in oil prices will, therefore, have a direct on national GDP growth," she added.

According to Badri Management Consultancy, the UAE insurance industry concluded 2019 with an estimated gross written premiums of Dh40 billion, a growth of 1 per cent from the previous year. This was fuelled by an 8 per cent growth in the top line of listed companies. The profitability exhibited a significant growth of 20 per cent, reaching Dh2.2 billion in 2019.

Investment pressure
Young noted that GCC insurers' exposure to real estate and equities is 30 per cent and 17 per cent, respectively. These exposures are high, relative to investment portfolios of insurers in developed countries. Given this weighting, AM Best expects GCC insurers to experience material balance sheet volatility in 2020.

The ratings agency expects that a fall in equity markets and a potential decline in local real estate valuations will erode capital buffers. Moreover, interest rate cuts, dividend freezes and impairments to real estate valuations will reduce investment income and negatively impact profitability in 2020.

Impact of Covid-19
Hatim Maskawala, managing director of Badri Management Consultancy, said the Covid-19 impact has taken many forms, including reduced business activities leading to a drop in top-line business, low investment returns or investment losses, delayed reporting and settlement of claims, and changes in claims frequency and severity based on the class of business.

"The loss ratios experienced in the motor segment are expected to move favourably due to restrictions in movements. However, the refunds or reductions in insurance premiums might offset the favourable impact. While the the current loss ratio for the medical line may show improvements as the Covid-19 related costs are born by the government," said Maskawala.

In addition, the insurance sector is adversely exposed to claims from event cancellations, business interruption or travel risk as a result of the pandemic, which may pull down the bottom line for the industry from insurance activities, he added.