Gulf Cooperation Council (GCC) insurers’ product portfolios — including motor, general accident and fire, marine and aviation, and life and health — show positive growth prospects, but present different risks, say Moody’s analysts.
“Motor insurance, the largest line of business in most GCC insurers’ portfolios, presents modest levels of insured risk reflecting its granular, short-tailed nature,” said Mohammed Ali Londe, a Moody’s analyst based in Dubai. “Retention rates in the segment are high, though loss ratios have historically been weak, with excess capacity and poor pricing techniques major contributors.”
Each line of insurance has its own inherent credit characteristics such as volume, profitability, volatility and growth opportunities. Motor insurance represents the largest share of portfolios (generally more than 40 per cent of gross written premiums, (GWP) for GCC insurers. Retention rates are high, but historically loss ratios have been weak as a result of intense competition and low barriers to entry.
Motor underwriting performance has recently improved as a result of more emphasis on underwriting expertise and a focus on comprehensive motor covers instead of third-party liability (TPL). TPL cover is already compulsory in many GCC markets. Growth potential of motor segment is good amid improving economic conditions and high disposable income in the region.
General accident and fire, encompassing residential and commercial property insurance and related liability covers, is a relatively high-risk segment accounting for less than one third of GCC insurers’ premiums normally. As a result of the often high risks underwritten in this segment, retention is usually relatively low in the region (around 36 per cent in 2013 for a sample of insurers in the GCC) and the loss ratio for the same sample is around 54 per cent.
“Some insurers are affected by high claims, often due to unsophisticated underwriting practices. However, we feel that this line has good growth potential due to the increasing number of infrastructure and construction projects,” said Harshani Kotuwegedara, an analyst with Moody’s.
Marine and aviation represents less than 20 per cent of total premiums of most GCC insurers. There are high risk exposures in the segment and many GCC insurers have limited technical ability to evaluate and absorb such risks, which leads to retention levels in this segment being very low. Many insurers often act as fronting agents for global reinsurers, leading to considerable amounts of commission income.
“Over time, we expect some insurers, especially the larger regional players, to continue improving their underwriting capabilities and thereby reduce reliance on reinsurance, leading to the retention of more underwriting risk on balance sheet,” said Londe.
Life and health insurance has historically been an unpopular product line among the GCC population. Life insurance penetration is low in the GCC, and typically represents low insurance risk and generally low loss ratios. Losses have occasionally been higher in health insurance. Retention rates are relatively high and the line has been growing fast on the back of rising affluence and increasing knowledge of the benefits of life and health insurance. Most life policies in the region are short-term credit life policies which are usually lower risk than those in the western world.