Many insurance companies in the GCC have experienced a drastic decline in operating performance and risk-adjusted capitalisation, as a result of new regulations in GCC markets enhancing minimum capital and solvency requirements, as well as incorporating actuarial based pricing and reserving, says A.M. Best.
In a new Best’s Special Report, titled “GCC Insurance Market Regulatory Developments Promise Greater Stability and Confidence”, the international rating agency says however that it believes that despite the immediate adverse impact, these necessary regulatory changes place the markets on the right trajectory for greater financial stability in the future.
To assess the overall impact of the new regulations on insurers, and how this affects the rating fundamentals over the short to medium term, A.M. Best undertook an in-depth look at recent regulatory developments in Saudi Arabia and the UAE, the two largest markets in the GCC.
Mr Salman Siddiqui, senior financial analyst, and one of the authors of the report, said: “Following Saudi Arabia's regulatory reforms in 2013, A.M. Best has seen that in spite of painful short-term corrections and the growing likelihood that some of the weaker players could exit the market, the longer-term prospects for the Saudi Arabian insurance industry will likely yield greater stability and profitability.”
The UAE has taken a similar road to regulatory reform, but it is at an earlier stage. Mr Michael Dunckley, senior financial analyst, and co-author of the report, added: “The UAE’s approach to capital modelling under the new regulations has been more comprehensive than in Saudi Arabia. It has a risk-based capital model that takes into account all classes of business and addresses the asset side of an insurer’s balance sheet in addition to its underwriting activity.”
Many insurers must endure painful adjustments as they move in line with new requirements, with significant impact on their financial health arising mainly from the adoption of prudent reserving practices. Actuarial based pricing and reserving have further emphasised the intense competition and pricing pressures within these markets, in addition to the weak approach to reserving for many market participants.
Several insurers in the GCC have struggled as a result of poor data quality, lack of technical expertise, inadequate accounting and actuarial practices, and volatility arising from poor risk management and governance. The newly introduced regulations in the region have been designed to address these issues, says the report.
In A.M. Best’s view, it is inevitable that there will be winners and losers in the region, with the better capitalised, more sophisticated companies remaining and gaining market share, and with the gap between the larger and smaller carriers widening. While the jury is out on whether regional regulators will opt to actively police their respective markets, over the longer term, improvements in insurance regulation within the GCC should result in greater stability and confidence.