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Strong capital barriers protect Gulf insurance companies from epidemic claims

Analysts said strong capital barriers helped insurers in GCC countries avoid negative credit rating actions during the coronavirus pandemic, and the sector has proven to be more resilient than some other sectors in the region.

However, they cautioned that regional insurers have significant exposure to the equity and real estate markets, which could affect their profitability.

"There have not yet been any rating measures related to COVID-19 or oil prices at domestic insurers, which is good news," said Amir Mojicz, director and principal analyst of insurance ratings at Standard & Poor's, a credit rating agency.

"However, we witnessed some insurer rating actions in the region in the first part of the year for company-specific reasons. These measures could include governance, spending efficiency, dilution of liquidity precaution, etc.," Mojic explained while addressing a webinar: We say that the ratings of insurance companies in the Gulf Cooperation Council countries were more flexible compared to other sectors in the region.

Ali Karakoyo, director and principal analyst for insurance ratings at S&P Global Ratings, said the insurance sector entered this pandemic with a strong level of capitalization compared to the financial crisis of 2008.

However, Mojic warned that the second exemption could damage the capital of Gulf insurance companies and lead to some negative rating actions in 2020-21.

"Once you look at the insurance ratings, it's safe to say they are relatively strong. However, 20 percent of the forecast is negative, indicating that there may be rating action over the next two years. A major one. reasons why ratings in the region are relatively strong. Because nearly 90 percent of insurers maintain reserve capital equivalent to AAA or AA trust level. Only 10 percent of insurers we rate in the region have capital buffers that are BBB or less than the capital base forms, ”added Mujkic.

He added that insurers here have been lucky that underwriting losses have so far been relatively low.

"Medical and auto claims have declined significantly during the lockdown, and the death rate in the Gulf has been relatively low so far, which means that the impact on life insurers has been low. Insurance other than life insurance, such as business interruption, seems modest this time, said an analyst at Standard & Poor's.

Hatem Maskawala, Managing Director of Badri Management Consulting, said that insurance companies in the UAE and Saudi Arabia will witness the impact of the Covid-19 crisis on corporate results in the second half of 2020.

He noted that aggregators will also play an important role because consumers are able to compare prices from all channels with great transparency, which forces insurance companies to sell, sometimes at prices at a loss.

"In the first half, due to the lockdown, auto rate claims decreased dramatically, but at the same time corporate cash flow also decreased. There was a price competition on the auto side that saw the price drop that will have a impact in the second half of 2020 and 2021 when things return to At the same time, there is a tendency for fewer people to leave and therefore fewer cars on the roads. Price competition will consume some corporate profits, "he said Maskawala.

On the medical side, he said that the way governments handle Covid-19 payments is crucial.

"If companies introduce a lower-priced policy among competitors, these lower premiums mean that companies are likely to end up with losses. This is the challenge facing insurance companies. In Dubai, Covid-19 medical claims they are generated by the companies while they are in Abu Dhabi, "Mascuala added. The Abu Dhabi government pays for Covid-19, so Dubai Governor's companies have a relatively higher loss ratio compared to companies that have a portfolio in Abu Dhabi Medical Insurance. "

Investment exposure

Insurance companies in the GCC countries are heavily exposed to stocks and real estate that are considered high-risk assets, while the capital adequacy of many GCC countries has weakened in the last two months.

"All equity markets in the region are still in a losing zone despite some recovery in the second quarter. Dubai property prices fell 11% in the first half and are expected to continue to decline. Businesses are exposed to significant exposure to stocks, real estate, etc. Rising levels are risk assets, therefore it is clear that they will see weaker earnings in the first half. If the situation continues, this may be the case in the second part of the year ".

Standard & Poor's analysts argue that insurance companies in the Gulf Cooperation Council countries reported strong underwriting results in the first half of 2020 due to lower auto and medical claims that will account for about 60 percent or more of the total business in some regional markets. This IPO will help offset your weaker earnings results throughout the year to see how the stock market continues to develop.