No one thought that global price of oil, which was $110 per barrel in 2014, will fall by a quarter after two years. The current $40 per barrel oil price also shows that the market has not yet improved.
Reports show that the price of this commodity is set to remain under pressure for long at higher levels than those seen in December. In fact, the fact that oil price has reached $9 in 1998 tells us that the current price may further go down. Meanwhile further decline of the price would have serious negative impacts on the economy of the world in general. The impact will be more severe for the oil-reliant emerging countries.
Experts in the sector say that a further decline in demand and/or boosting the oil supply may be prompted by demand decline from oil-importing emerging markets, like China, increased shale oil extraction – mainly from the United States as well as the prospect of Iran re-entering the market as a major supplier following the lifting of some oil-related sanctions.
It is now clear that low oil prices over the short-to-medium term may not that much impact the economies of emerging markets. But no doubt that if the situation continues for long, it will definitely have a serious damage on these countries. At the end of the day, this will have consequences for the domestic insurance industry, in terms of handling the higher economic unpredictability and doubts arising from fluctuating economic landscapes.
What does it mean for the insurers?
Over the past years augmented insurable risks have resulted in significant premium revenues for insurers in the emerging oil-rich markets.
Investments in energy, infrastructure and industrial development projects by both the government and private sector are often mentioned as major contributors for the revenue boost. In addition, the introduction of mandatory covers, mainly on motor, medical and liability classes have also contributed a lot.
However, there is concern that in the face of plummeting oil prices, investment will slow down considerably. As such, domestic risk carriers may no longer be able to achieve top-line premium growth at levels previously experienced.
Meanwhile many reports show that in the last five years, the underwriting performance of domestic insurers in many emerging economies has been negative. This is mainly because of increasing market competition, weak technical discipline and deteriorating claims experience.
For instance, Russia, Nigeria, Brazil, Kazakhstan and the countries of the Gulf Cooperation Council (GCC) are facing major challenges, according to A.M. Best report.
It was in the first half of 2015 that Russia moves into economic downturn with projected shrinkage of 3.7%. Economic forecast also shows that the downturn growth will be prolonged till the year 2017.
The country approved its budget in December 2015 assuming that oil price will be $50 per barrel on average and an exchange rate of Russian rubles 63.3 to one US dollar.
Unfortunately, Brent crude currently trades at approximately $40 per barrel, and the exchange rate with the U.S. dollar has gone down to 70.0 rubles.
These shocking conditions have spilled over into the domestic insurance market’s growth and profitability, and the sector’s growth has consequently deteriorated. Gross written premiums for the voluntary market segment declined by 4.2% in 2015, and the insurance market remains characterized by softening pricing conditions and intense market competition.
What is happening in Nigeria?
The economy of Nigeria, Africa’s biggest market almost gets 75% of its total income from oil. Oil also represents 90% of Nigeria’s total export earnings.
The falling price of oil is severely affecting negatively the growth of the country like Russia. The Nigerian naira is currently trading at approximately NGN 350 relative to the U.S. dollar, compared with the official peg of around NGN 197. As a result, the insurance sector like any other sector is highly exposed to uncertainty.
The same is true for Brazil. Brazil’s insurance industry has been less dramatic when compared to its oil-producing peers. While Brazil does generate between 10-15% of its GDP from the oil and gas industry, the majority of its GDP is derived from service industries.
In general with oil prices continuing to be low and volatile, global consequences are expected and their effects will be felt particularly keenly in oil-dependent emerging markets and the financial sectors including insurance business.