DOHA: With limited volumes of traditional investment options such as fixed-income bonds and sukuk, insurers in the GCC economies, including Qatar, 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 yesterday.
There are limited traditional investment options available. The region’s investment mix continues to be dominated by equity and real estate, accounting for roughly 65 percent of the total invested assets in 2013, as opposed to 13 percent in Western Europe.
“Equity and real estate account for a material portion of GCC insurers’ total invested assets,” said 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 percent 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. The report also highlighted that the real estate is one of the key investment asset classes for insurers of the region, but valuations are volatile. However, it noted that significant spending on real estate by GCC governments for example in advance of the upcoming Expo 2020 in the UAE and FIFA 2022 in Qatar have resulted in wider and more attractive real estate investment options for insurers.
Real estate, a key investment class, accounted for over 20 percent 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,” added Harshani Kotuwegedara. “However, regulatory frameworks are gradually evolving in many countries, including limitations on investment in high-risk assets.”
Middle Eastern equities have historically yielded volatile returns because of the market’s relatively smaller size and the recent turbulence in the global financial
markets. The Peninsula
