Financial system risk primarily arises from shortcomings in bank regulation, which the agency considers to be weak, although it acknowledges that the banking supervision is being improved. The report cites tighter mortgage regulation and limited credit exposure to borrowers, including to the key government-related entity sector as positives, but expresses concern that these changes will take time to have an impact.
The agency considers geopolitical risk prevalent in the Middle East as an important factor. It says the UAE is exposed to some contagion risk, even though it is generally accepted as a relatively safe domicile in the region, for both residence and assets. “UAE’s political process remains highly centralized, which lessens policy predictability and transparency, in our opinion”.
S&P says the quality of UAE’s institutional framework acts as the main drag on its assessment and points out that regulatory oversight of the domestic market is weak. Over the next five years, the agency expects insurance supervision to become more in-depth and proactive. This weak assessment factor is balanced by what it sees as low insurance product risks, despite fierce competition for the high-volume medical and motor lines, and generally neutral earnings characteristics.
“We view the payment culture and the rule of law in the UAE as weak. As in most Gulf markets, the legal infrastructure is not necessarily supportive of creditors in terms of predictability and timeliness of the recovery of collateral from debtors in the event of bankruptcy or foreclosure.”
An unpredictable element in its forecast about the insurance market is the impact of the introduction of compulsory medical insurance in Dubai in 2014. This will certainly prompt premium growth, but the scale is not easy to predict. S&P does not expect this move to have a demonstrable effect on premium growth, and earnings in particular, until 2015.
In its view, the potential for product risks to trigger volatility to returns as low. The UAE has no history of significant insured loss caused by natural catastrophe events (e.g., storm or earthquake), even though it is within the vicinity of the Persia/Indo-Asia tectonic plate boundary, earthquakes on which can cause minor tremors in the country. There is an element of flood risk, but the major domiciled (and so insured) areas are protected from this. Again, there is no history of significant insured loss.
In common with other markets in the Gulf Cooperation Council (GCC) region, the risk from unpredictable claims settlements is rated as low. The UAE is not a litigious market, and courts are rarely used for claims settlement. There is no incidence of long-tail liability exposure.
The UAE insurance market is a high user of reinsurance protection, particularly for high-value risks such as marine, aviation, and transport or property lines, but the reinsurance community actively seeks these risks because of their attractive performance record and the quality of the risks. The strength of the reinsurance relationships sustained by the local market, particularly the larger entities, does reduce product risks, though reinsurers are now much more selective on partners and terms and conditions than they were a few years ago. Motor and medical lines are usually highly retained, but these are fiercely competitive lines.