Insurers and reinsurers operating in the Middle East are well capitalized, although fiscal budget pressures and pockets of political instability overshadow strong balance sheets. Commercial activity is highly correlated to oil demand and the recent period of low energy prices has depressed gross domestic product (GDP) development, and consequently, investment and construction across the region.
In a new special report, titled, “Middle Eastern Insurers Maintain Strong Capital Levels to Offset Volatility,” A.M. Best states that fiscal budgets will remain under pressure from low oil prices, which is likely to continue to result in reduced government expenditure and negative pressures in terms of business volumes. In addition to the economic slowdown, there have been ongoing pockets of political instability and conflict, and these are expected to continue in 2017.
The research shows that in light of these market conditions, there has been a slight weakening in a number of Long-Term Issuer Credit Ratings in 2016 compared with the previous year. This has been driven by weakening capital positions and worsening technical performance for certain companies. However, the report also notes that upgrades were a result of improving capital positions, strong technical performance and the increasing strategically important role of certain players within larger groups.
Greg Carter, managing director, analytics, said: “A.M. Best notes that the bigger Middle Eastern insurance and reinsurance companies enjoy dominant market positions. Market leaders exhibit strong technical performance as they have established effective distribution systems, making it challenging for rivals that have set up more recently. Excess capacity and intense competition has also resulted in difficulties for new market entrants to attract good quality business.”
The report adds that companies operating in the Middle East face significant investment risk as in certain countries, equity markets face illiquidity issues. Shares are often tightly held, with trading volumes lower than those in more mature stock markets. As investment markets tend to be volatile, companies tend to be well capitalized to offset these risks.
Yvette Essen, director, research and communications, and author of the report, added: “Sound capitalization also has been driven in part by more stringent regulatory demands for some countries in the region. In A.M. Best’s opinion, Saudi Arabia and the United Arab Emirates’ more prudent regulatory environments will set the pace for the wider Middle East region. In the longer term, pressure on capital as a result of regulatory burdens will be good for credit quality, but there will be a period of short-term pain for existing market participants.”
To access a complimentary copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=258285
A.M. Best is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com
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