Overcapacity in the GCC's reinsurance market, which has led to further softening of reinsurance rates, will continue to add pressure to Gulf reinsurers' financial profiles, says Moody's Investors Service in a report published today.
"Although underwriting loss ratios for many Moody's rated players in the region are generally healthy given the benign claims environment, overcapacity in the GCC reinsurance market has led to a softening of rates, adding pressure on margins at a time when investment returns will likely remain at historic lows. We expect these trends to continue in the coming years, absent significant deteriorations in underwriting loss ratios", says Mohammed Ali Londe, an analyst at Moody's.
The primary insurance rates in the GCC region have continued to soften in 2014, particularly in Qatar. The ongoing primary market rate softening, together with overcapacity in the global reinsurance market, will likely put further downward pressure on reinsurance rates within the region. Property catastrophe loss free policies typically declined 10 per cent at January 2015 across the Middle East, with property risk loss free accounts also down approximately five per cent. These rate reductions, combined with a loosening of terms and conditions, will exacerbate profitability pressures over time. Increased competition could lead to further pressure on already declining reinsurance rates in the region and the worsening of a market already exhibiting signs of excess-capacity, as many reinsurers still find this region attractive, particularly from a geographic diversification perspective, says Moody's.
According to Moody's, the local reinsurance market looks set to expand over time as the majority of international reinsurers primarily focus on conventional reinsurance, underwriting larger commercial risks, and in many cases providing the reinsurance expertise and capital to enable local insurers to effectively act as fronting agents. Use of reinsurance in the GCC is generally significant, with premium retention levels by insurers in the Middle East often low - on average 63 per cent, compared with around 90 per cent for some of the largest global insurers, as a result of providing insurance coverage to large hydrocarbon-related companies. The potentially high claims hydrocarbon-related projects expose insurers to, as well as the specialist insurance skills required to effectively underwrite such risks, makes them a natural choice for ceding to reinsurers, but also exposes reinsurers to the impact of lower current oil prices, says Moody's.
The rating agency notes that declining oil prices in the region could lead to lower investment in new commercial projects which would in turn reduce demand for reinsurance coverage on such classes. Moreover, geo-political uncertainty in the region remains high.
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