“The insurance markets of the Middle East remain small in global terms, with penetration rates markedly lower than in many Western economies. However, recent years have seen rates of growth of insurance premiums in these markets far in excess of those registered globally,” says Simon Harris, a Moody‘s Team Managing Director in the investors service’s Special Comment.

“We expect this trend to continue for the next few years on the back of rising per-capita GDP, increasing awareness of the benefits that insurance can bring and government actions to encourage individuals to save for their own retirement. In addition, Islamically compliant insurance – Takaful – is set to be a strong contributor to overall insurance growth in the Middle East,” Harris adds.

Middle Eastern insurance markets are often characterized by relatively high numbers of small, often specialized insurers, according to the Moody’s Special Comment entitled ‘Middle East Insurance set for continued strong expansion.’ Indeed, one of the key credit challenges for the markets in general is the often-significant number of smaller, often unsophisticated players. However, most markets also contain a handful of substantial and well-recognized market leaders, and Moody’s expects the trend of increasing numbers of larger and higher-profile insurers to continue as insurance markets in the region mature.

“Non-life insurance remains the dominant line of business, with most Middle Eastern markets showing relatively high levels of concentration on a select few insurance retail lines, and sizeable commercial insurance contracts relating to higher-risk infrastructure projects in the region, such as oil, gas and construction,” advises Jose Morago, a Moody’s AVP/Analyst and co-author of the report. “Nevertheless, the gradual broadening of insurance products and insurance purchasers should improve non-life product risk and diversification. Furthermore, life insurance is set to expand substantially, leading to a better level of overall insurance risk diversification.”

Until recently, regulatory systems across the region had been relatively weak, with some local markets being largely unregulated in many ways. However, substantial reform has been implemented in many markets to improve regulatory oversight, with capital requirements broadly increasing too. Consequently, regulatory standards in many markets and in particular in the new developed financial centers (DIFC, QFC) are in many ways comparable to those of more developed insurance markets, in Moody’s opinion.

Individual groups’ ambitious growth plans for the region suggest that capitalization levels will be paramount. The ability to source additional capital to support such growth will thus be a major credit issue for many groups. Moody’s adds that, while a clear credit positive for the region’s insurers is the virtual absence of material levels of financial leverage, the rating agency expects Middle Eastern insurers’ use of debt to increase somewhat going forward. (press release)