GCC insurers face softening renewal rates

GCC reinsurers are experiencing softening renewal rates amid overcapacity and limited natural catastrophe risks. However, despite the softening rates, the region remains a growth target, Moody's Investors Service said.

The market is characterised by overcapacity, with many international and local players competing for reinsurance business. "This, coupled with limited natural catastrophe risks, has resulted in a continued softening of reinsurance rates at the January 2016 renewals for the region," Moody's said.

"The additional pressure of softening rates on underwriting margins is credit negative for reinsurers, since it comes at a time when the companies' investment returns will likely remain low", said Mohammed Ali Londe, Moody's assistant vice- president and analyst. "We expect these trends to continue over the short-to-medium term, absent significant deterioration in underwriting loss ratios," added Londe.

However, Moody's notes that the GCC insurance market still holds potential for incremental revenues for reinsurers given the high growth potential, as reflected by the compound annual growth rate (CAGR) of 16.8 per cent in the GCC primary insurance market between 20062014.

The low insurance penetration and typically low natcat (natural catastrophe) levels except for Oman are other factors behind the growth potential, Moody's pointed out. "That said, prevailing low oil prices have resulted in a general slowdown in large infrastructure related projects and in the value of insured goods, and we anticipate a resulting slowdown in the (re)insurance sectors' growth in the GCC."

Another potential negative for reinsurers is increasing retention in the region. As local and regional insurance carriers have become increasingly sophisticated, insurers have sought to capture more of the value chain by retaining more insurance business on balance sheet and ceding less to reinsurers. Therefore, retention levels in the GCC have increased with the average retention among Moody's-rated GCC insurers at 60 per cent in 2014, up from 53 per cent in 2010.