GCC insurers continue to face investment risk given the dominance of high-risk assets in their investment mix, says Moody's Investors Service in a new report published today.
"Equity and real estate account for a material portion of GCC insurers' total invested assets," says Mohammed Ali Londe, a Moody's Analyst. "Because of low interest rates in the GCC region, traditional investment options offer low returns compared with those of equity and real estate, weakening the appeal of traditional investments."
Equities remain the key asset class for GCC insurers, accounting for over 40% of total investments in 2013. Middle Eastern equities have historically provided volatile returns given the market's relatively small size and the recent turbulence in the global financial markets. Furthermore, the Middle East lacks extensive use of risk mitigation strategies such as hedging, and a significant rise in the use of such techniques is unlikely in the medium term.
Real estate is also a key investment class, accounting for over 20% of total invested assets in 2013. The main risks of real-estate assets stem from their valuation and liquidity. Specifically, real-estate assets are often recorded in insurers' financial statements at market value, exposing the balance sheet to volatility. In addition, liquidity of real estate is frequently low, with a surplus of completed properties further limiting the ability to liquidate real-estate assets quickly at balance-sheet values.
"The current regulatory framework for GCC insurers does not fully reflect the risk posed by material investments in high-risk assets," adds Harshani Kotuwegedara. "However, regulatory frameworks are gradually evolving in many countries, including limitations on investment in high-risk assets."
Moody's expects that, over time, GCC insurers' investment strategies will shift towards higher allocations to lower-risk assets.
The report, "Gulf Cooperation Council Insurers: Investment Risks Remain a Credit Negative in the Medium-Term", is now available on Moody's website.
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