Tightening liquidity to deter recovery of GCC insurers’ receivables
The GCC’s insurance market is expected to grow to $36.1 billion in 2024 from $29.2 billion in 2019
Tightening liquidity in the GCC will hinder recovery of receivables for insurers who are already exposed to substantial levels of receivables, Moody’s Investors Service said in a report.
Leading P&C (property and casualty) insurers in the GCC will be facing the “risk of increased provisioning and exacerbating pressure” on their profitability if the liquidity situation tightens further, said the rating agency.
The GCC’s insurance market is expected to grow to $36.1 billion in 2024 from $29.2 billion in 2019, as regional governments push to strengthen regulations, introduce mandatory insurance lines and diversify the economy, according to Alpen Capital.
The UAE and Saudi Arabia, the two top economies of the region, continue to dominate the insurance sector accounting for 44.3 per cent and 33.6 per cent of the region’s GWP in 2018, respectively.
“The coronavirus-driven economic shock caused a sharp decline in oil prices that widened the region’s budget deficits and will weigh on public spending across the region, with negative economic consequences,” said Mohammed Ali Londe, a vice president - senior analyst at Moody’s in Dubai.
“In particular, tightening liquidity will lead to delays in premium collections as well as pressures on the recoverability of intermediary and inter-insurance receivables, leading to additional requirements for provisions and eventual write-offs impacting insurers’ profitability and capital.”
Insurers in the GCC region have reported receivables equivalent to 117 per cent of shareholders’ equity, as of the end of 2019, compared with an average of 68 per cent for rated European P&C insurers.
Receivables from policyholders equated to 45 per cent of shareholders’ equity, broadly stable over the past few years and similar to 41 per cent for European insurers, while receivables from (re)insurers and intermediaries were significantly higher at 72 per cent compared with just 27 per cent for their European peers and having deteriorated from 47 per cent a few years ago, said the report.
The rating agency warned that as liquidity tightens in the GCC region, receivables from policyholders to grow, while at the same time existing exposures will continue to deteriorate in quality, leading to increased provisions and write-offs.
“While the level of GCC insurers’ receivables from policyholders was roughly in line with that reported by European insurers, receivables from (re)insurers and intermediaries were significantly higher at 72 per cent, compared with just 27 per cent for their European peers,” said Moody’s.
The risk of rising levels of receivables is highest for insurers serving small and medium sized enterprises and corporate clients, as retail customers in the region tend to pay cash for their policies upfront.
This risk is more pronounced for insurers serving small and medium sized enterprises and corporate clients, as retail customers pay cash up front. “Furthermore, the hit to profits for the region’s insurers will increase from the adoption of IFRS 9, which requires insurers to provide for possible future credit loss in the very first reporting period, including impairment losses on all receivables,” it said.
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