The ratings of insurers in the Middle East will remain constrained over the next 12 to 18 months, due to the concentrated and highly correlated investments in the local real-estate and equity markets, a Moody’s Investors Service report said.
However, as more sophisticated regulatory supervision and enterprise risk-management techniques become embedded in the sector, these pressures to expected moderate, Moody’s said in a new special comment.
“Our analysis highlights that investment risk typically remains the pre-eminent credit risk for insurers in the Middle East region, despite the fact that these insurers typically hold very strong levels of capitalisation relative to their underwriting risk,” said David Masters, Moody’s assistant vice president and author of the report.
Moody’s notes that the key driver behind this constraint on insurers’ ratings is that those insurers’ appetite for real-estate exposure will likely remain strong, despite the well-publicised downturn in certain GCC property markets, and the elevated credit risk associated with real estate in the region.
“In addition, we also believe that insurers are likely to maintain their exposure to equities,” said Masters. “This is partly due to the market expectation within the region that equity and real-estate valuations have largely bottomed out, but also because of the relative lack of other traditional asset classes in the Middle East region.”
Moody’s Special Comment shows that Takaful and Shari’a-compliance limits the investment choices available to Takaful insurers, with Sukuk bonds – a key alternative asset class – also relatively exposed to the property market.
In addition, whilst interest rates are currently low, Middle Eastern insurers have little incentive to hold bank deposits.
However, as more sophisticated regulatory supervision and enterprise risk-management techniques become embedded in the sector, Moody’s anticipates a shift towards fixed-income securities and bank deposits, a trend which is likely to accelerate if and when deposit interest rates increase to more normalised levels.
So far only a handful of the very largest groups in the region have implemented robust risk-management techniques.
Consequently, groups tend to set capitalization targets more in relation to regulatory minimum requirements and with only very limited reference to the investment risks on the insurer’s balance sheet.
In Moody’s view, the development of risk-management systems would represent a clear credit positive, as it indicates that insurers’ management teams have the intention and a growing ability to manage a group’s risks (including investment risk) and capitalization on a risk-adjusted and analytical basis.
In addition, insurance regulators in the region are increasingly embedding prudential insurance regulatory supervision philosophies into their monitoring of local insurance companies.
A more risk-related regulatory framework for insurers, combined with a future rebound in bank-deposit interest rates, leading to a reduction in real estate and equity exposures and an overall increase in lower-risk assets, might moderate these pressures over the medium term.