Moody’s says that the insurance industry in the Kingdom and Gulf countries has almost tripled through 2006-13, with insurance premiums increasing to $18.4 billion from $6.4 billion.

The rating agency says that increasing mandatory insurance covers, such as health, unemployment, motor third party and liability, have also increased market awareness and is a credit positive for the market’s product diversification.

Moody’s latest report outlines that regulatory measures being rolled out in the GCC are set to enhance the credit profile of the region’s insurance market and aid market stability and transparency.

Moody’s says that the measures will serve to strengthen several credit factors such as capital, by implementing risk based capital (RBC) measures to ensure capital is more correlated to the risk undertaken, and asset/liability quality by respectively limiting asset concentration and enhancing valuation measures.

These follow the rapid — but recently slowing — growth rate and surge in the region’s insurance sector.

Moody’s drills down to highlight that several takaful-specific regulations are credit positive as they strengthen policyholder security both directly and indirectly — directly by ensuring availability of capital and, in select cases, indirectly by improving capital access through requiring companies to list on the stock markets.

Increasing mandatory insurance covers, such as health, unemployment, motor third party and liability, have also increased market awareness and represent important credit-positive product evolution for the market’s diversification.

Moody’s says new regulatory changes will improve the credit profile of the region’s insurance market and aid market stability and transparency by strengthening several aspects such as capital requirements, asset quality and reserve adequacy.

Historically, GCC insurance market capital adequacy has been governed by simplistic minimum capital requirements with no risk-related aspect, although in most jurisdictions the minimum capital requirements are relatively high, such as the UAE minimum capital of AED100 million for insurers and AED250 million for reinsurers.

This lack of risk-reflective regulatory capital needs fostered variation in the market in terms of the types and levels of risk taken on by insurers, in terms of underwriting as well as investment risk with, for example, considerable deployment of capital into high risk assets such as real estate and equities.

Regulators in many states are now implementing RBC measures to ensure that the required capital is more closely correlated to the risks undertaken in aggregate by insurers.

New rules, such as those slated to be implemented by the Qatar Financial Center Regulatory Authority (QFCRA) from January 2015, stipulate an insurer’s minimum capital requirement to be the higher of $10 million and the insurers RBC requirement. This is in addition to other specific requirements which must be satisfied for risk management strategy and policy, as well as the submission of an own risk and solvency assessment (ORSA).

Overall, Moody’s expects these capital-centered regulatory changes to encourage insurers to focus on ensuring effective use of capital, leading to improving underwriting quality and possibly reduce pricing volatility.

The increased operating stringencies and implied additional costs of monitoring, managing and reporting may also encourage consolidation amongst some smaller market players, potentially reducing competitive pressures and aiding market stability.

In many GCC countries, Moody’s says authorities have sought to protect consumer rights through the mandatory purchase of certain insurance covers, with for example mandatory motor third party insurance across the GCC jurisdictions, medical cover in Saudi Arabia, Qatar, Abu Dhabi and the recently introduced mandatory medical cover in Dubai.

With respect to health insurance, Moody’s expect the rest of the region to follow suit and implement mandatory health cover in the near future.

Mandatory cover is also required for GCC nationals with regards to unemployment insurance in Saudi Arabia, Kuwait and Bahrain.

Saudi Arabia also has plans to introduce mandatory third party liability cover for organizations carrying out hazardous activities in residential areas, according to the report.

Such mandatory covers have also helped to increase consumer awareness and insurance penetration whilst also opening avenues for insurers’ product diversification, credit positives for the market. However competition on these covers has contributed to volatility in pricing and profitability. As a result some regulators have enforced premium rate corrections, reserve strengthening and service provider pricing regulations for health care service providers, motor parts and garages, in an effort to stabilize markets.

Moody’s expect the increasing regulation of the insurance market will help to stabilize this volatility and further encourage market growth, although additional regulatory intervention may still be required in certain scenarios to ensure well-functioning markets.