International expansions help Qatar insurers achieve growth rates; competition to weigh on 2019 earnings

International expansions and acquiring of local businesses from foreign players have helped a section of Qatari insures to achieve healthy growth rates in 2018. Restrictions of foreign companies writing motor business at very low rates and hardening reinsurances rates could support the industry in Qatar this year, S&P Global Ratings noted yesterday.

The rating agency that noted that “some GCC insurers will Increasingly feel the heat In 2019’ said that the overall premium volumes in Qatar have gone up only marginally over the past few years, since competition has restricted growth in some business lines.

Although reinsurance rates in some lines are rising, and so will infrastructure spending for the FIFA World Cup in Qatar in 2022, S&P Global does not see much growth potential in the local market in 2019 in the absence of new mandatory insurance covers.

Insurers in Qatar are also likely to remain exposed to some earnings volatility. This is because some of them may increase their risk appetite while in search of top-line growth, either via lowering rates or exploring new or unfamiliar foreign markets.

“Overall, market conditions in Qatar will remain highly competitive and, like in the UAE, several Qatari insures could be required to increase provisions for bad debt and aging receivables companies, leading to a decline in profitability in 2019 compared with 2018. However, some restrictions on foreign companies writing motor business at very low rates and hardening reinsurance rates could be mitigating factors, in our view,” S&P said in its report.

S&P Global Ratings said it believes mounting competition, more volatile investment returns, higher regulatory costs, and stricter accounting standards will weigh on Gulf Cooperation Council (GCC) insurers’ earnings this year.

What’s more, growth of gross written premiums (GWP) in most GCC markets will likely stay sluggish, due to the lack of new mandatory insurance coverage and difficult economic conditions. Although the GCC’s six insurance markets should remain profitable, it anticipates a decline for some of them this year.

The main factors threatening insurers’ earnings in 2019 are increasing competition in the region’s overcrowded insurance markets, higher operating costs, and lower investment results due to volatile equity markets and falling real estate prices.

Added to this is the need to increase provisions amid tighter regulation and standards. Under the new accounting standard (IFRS 9), insurers are now required to apply a more forward-looking approach to provisioning for credit losses, which will increase such provisions on initial adoption.

S&P took negative rating actions on nearly every sixth insurer we rate in the GCC in 2018, mainly because of weak earnings, rising risk exposure, and/or weaknesses in governance arrangements. Yet about 30 percent of its ratings still carry negative outlooks or are on CreditWatch, indicating the possibility of further downgrades in 2019.

Over the past 12-18 months, an increasing number of companies were unable to cope with high competition and either a lack of effective regulations or tougher regulations, resulting in a rising number of qualified audit opinions or even temporary license suspensions.

Taken together, these are initial signs that smaller or weaker players will have to improve their profitability, derisk asset exposures, and update their control and governance frameworks to reduce risks from a further weakening of credit conditions in 2019.

Having said that, S&P’s ratings on most GCC insurers are still relatively high. This is because many of the GCC insurers it rates are among the largest and strongest entities in their markets.

Most companies show healthy capital levels according to S&P’s risk-based model, which the rating agency views as a key rating strength. In many cases, capitalisation is stronger than that of peers in other emerging or developed markets in Europe, the Middle East, and Africa.

Following years of double-digit year-on-year GWP growth, most of the GCC insurance markets are now experiencing a relative lull because of weaker economic conditions and the absence of new mandatory coverage.

However, longer-term growth prospects remain satisfactory, since the percentage of premiums to GDP of 1.5 percent-3.5 percent in most GCC markets is still relatively low compared with that in other developing markets.

S&P believes top-line growth will continue to stem mainly from government-led initiatives, such as infrastructure projects and new mandatory medical and other insurance cover

Source from: The Peninsula