The insurance industry in the countries comprising the Gulf Cooperation Council (GCC) – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates – has almost tripled through 2006-13, with insurance premiums increasing to $18.4 billion from $6.4 billion, Moody's Investors Service said in a new special comment published on Monday.
In response to the rapid – albeit recently slowing – growth rate and boom in the region’s insurance sector, a range of regulatory measures are being introduced within the GCC insurance industry. These regulatory changes will improve the credit profile of the region’s insurance market and aid market stability and transparency by strengthening several aspects such as capital requirements, asset quality and reserve adequacy.
Additionally, a number of takaful-specific regulations are credit positive as they strengthen policyholder security directly by ensuring availability of capital, or in some cases indirectly by improving capital access through requiring companies to list on the stock markets.
Increasing mandatory insurance covers, such as health, unemployment, motor third party and liability, have also increased market awareness and is a credit positive for the market’s product diversification.
The GCC economies are diversifying away from oil and gas based revenues, resulting in large infrastructure and industrial projects. The GCC is also focusing on growing as a high-end tourist destination and, in line with this aim, is the venue for large international events such as Formula 1, 2020 World EXPO and the 2022 FIFA World Cup.
At the same time, insurance markets in the GCC have grown quickly and often aggressively, with varying degrees of sophistication and fierce pricing competition in many regional markets, with several players determining premiums based on competitor rates, rather than true risk-based underwriting.
This has driven volatility in underwriting results and hindered sustainable growth. Furthermore, market awareness and the perception of commercial and retail consumers is negatively affected by the often constant flux in pricing, variation in consistency of the services provided, the quality of the products provided and claims handling.
To deal with the expansion in scope and type of risk covered by insurers, and to address often poorly-performing markets, regional regulators are implementing enhanced insurance regulations and guidelines. These reforms generally address risk based capital (RBC) and minimum asset liability management (ALM) standards, pricing adequacy, corporate governance and transparency, and introduce mandatory covers.
“We expect that the new regulations will lead to greater stability within the GCC insurance marketplace. Most of these regulations are evolutionary by way of market consultation, which should help in the market’s understanding and acceptance of these, albeit leading to a slightly slower implementation process.”
Historically, GCC insurance market capital adequacy has been governed by simplistic minimum capital requirements with no risk-related aspect, although in most jurisdictions the minimum capital requirements are relatively high, such as the United Arab Emirates’ (UAE) minimum capital of AED100 million for insurers and AED250 million for reinsurers. This lack of risk-reflective regulatory capital needs fostered variation in the market in terms of the types and levels of risk taken on by insurers, in terms of underwriting as well as investment risk with, for example, considerable deployment of capital into high risk assets such as real estate and equities.
Regulators in many states are now implementing RBC measures to ensure that the required capital is more closely correlated to the risks undertaken in aggregate by insurers. New rules, such as those slated to be implemented by the Qatar Financial Centre Regulatory Authority (QFCRA) from January 2015, stipulate an insurer’s minimum capital requirement to be the higher of $10 million and the insurers RBC requirement. This is in addition to other specific requirements which must be satisfied for risk management strategy and policy, as well as the submission of an own risk and solvency assessment (ORSA).
Within the UAE, the UAE Insurance Authority’s Draft Combined Regulations of 2013 stipulate the minimum capital requirement to be no less than 1/3 of the solvency margin, which in itself is computed based on a solvency template provided by the regulator and covers underwriting, market and liquidity, credit and operational risk measures.
In Oman, insurers may need to prepare for mandatory enterprise risk management (ERM) standards and principles.
Additionally, some jurisdictions are imposing rules on the types of business being written, for example composite insurers in the UAE have until August 2015 to segregate life and non-life into separate undertakings. Another example is the Oman Capital Market Authority (CMA) imposing a segregated entity setup for conventional and Takaful operations.
Overall, Moody’s expect these capital-centered regulatory changes to encourage insurers to focus on ensuring effective use of capital, leading to improving underwriting quality and possibly reduce pricing volatility. The increased operating stringencies and implied additional costs of monitoring, managing and reporting may also encourage consolidation amongst some smaller market players, potentially reducing competitive pressures and aiding market stability.
In many cases, the high capital buffers held by GCC insurers coupled with the current low interest rate environment has encouraged investment in riskier asset classes, such as real estate and equities. These investments are often highly illiquid, leading to asset/liability mismatches. Some of the proposed regulations set out specific guidance on asset distribution and allocation limits, investment-related risks, the domiciling of investments and the use of derivatives in a bid to deal with this.
Regulations that encourage a reduction in asset class concentration as well as encourage broader geographic asset diversification will improve overall asset quality, which is often a major constraint for many GCC insurers’ credit ratings. Some regulators are also strengthening technical reserve calculations by requiring periodic assessments by authorized actuaries and the submissions of calculations to regulators. A similar focus on ALM has been proposed by regulators in Saudi Arabia, Qatar, UAE and Bahrain. Moody’s expect the requirement for actuarial-led reserve setting, monitoring and reporting to enhance reserve adequacy and encourage insurers to more accurately set premium rates and become increasingly selective in the risks they underwrite.
Takaful insurance is experiencing rapid growth in the GCC and some regulators have responded by proposing a host of new takaful-specific regulations. For instance, the Central Bank of Bahrain’s (CBB) proposed regulatory framework for Islamic insurance, amongst other areas, may enforce the use of capital injections from shareholders to finance any policyholders’ fund deficits. In Moody’s view, this would ensure that the capital buffer for takaful policyholders is preserved, aiding policyholder security.
Moody’s also noted that following the draft Takaful law of Oman CMA, companies wishing to operate as a Takaful entity in Oman were required to be listed on the Muscat Securities Market (MSM). Moody’s believe that this over time will improve access to capital markets and is thus a credit positive.
Many of the new regulations relate to the implementation of more stringent corporate governance requirements i.e., board level investment committees, internal audit departments and approved actuaries. Although many insurers already have such mechanisms in place, these requirements will enhance the corporate governance levels of the industry in aggregate. Transparency, a key deficiency in the GCC insurance markets, will also improve with periodic (quarterly, bi-annual and annual) and early warning reporting as proposed by some regulators.
In many GCC countries, authorities have sought to protect consumer rights through the mandatory purchase of certain insurance covers, with for example mandatory motor third party insurance across the GCC jurisdictions, medical cover in Saudi Arabia, Qatar, Abu Dhabi and the recently introduced mandatory medical cover in Dubai.
With respect to health insurance, Moody’s expect the rest of the region to follow suit and implement mandatory health cover in the near future.
Mandatory cover is also required for GCC nationals with regards to unemployment insurance in Saudi Arabia, Kuwait and Bahrain. Saudi Arabia also has plans to introduce mandatory third party liability cover for organizations carrying out hazardous activities in residential areas.
Such mandatory covers have also helped to increase consumer awareness and insurance penetration whilst also opening avenues for insurers’ product diversification, credit positives for the market. However competition on these covers has contributed to volatility in pricing and profitability. As a result some regulators have enforced premium rate corrections, reserve strengthening and service provider pricing regulations for healthcare service providers, motor parts and garages, in an effort to stabilize markets.
Moody’s expect the increasing regulation of the insurance market will help to stabilize this volatility and further encourage market growth, although additional regulatory intervention may still be required in certain scenarios to ensure well-functioning markets.