The impact on insurers at the heart of the current Middle East conflict is expected to be limited but there are warnings that any change if it becomes a drawn out war.

Ratings agency Moody’s has issued a new briefing which concludes the credit impact of the Iran conflict on Gulf Cooperation Council (GCC) insurers is expected to be limited in the near term, with most pressure coming through investment portfolios rather than insurance claims. However, a prolonged or escalating conflict could materially weaken insurers’ balance sheets and credit outlooks.

The analysis added: “We expect the near term credit impact of the Iran conflict on insurers in the Gulf Cooperation Council (GCC) region to be limited. Our baseline scenario is that the conflict will be relatively short-lived, likely a matter of weeks, and that navigation through the Strait of Hormuz and air traffic will then resume at scale. Under this scenario, GCC insurers would not face immediate material pressure on their credit profiles.”

The Near-term impact baseline scenario is that the conflict will be relatively short-lived, with shipping through the Strait of Hormuz and air traffic resuming at scale, limiting immediate credit pressure on GCC insurers.

However investment exposure is the main risk channel, Moody’s warned. “Any disruption would hit insurers mainly via asset valuations, particularly equities and real estate, rather than underwriting losses. Larger, diversified insurers are less exposed due to lower concentration in real estate and equities and stronger capital buffers.”

It continued: “Smaller GCC insurers typically have thinner capital cushions and higher exposure to volatile asset classes, making them more sensitive to market shocks.”

“The direct claims impact of the conflict will likely be negligible for all GCC insurers, as war risk is typically excluded from standard insurance policies in the region,” Moody’s explained. “London market insurers generally underwrite this risk, including for energy and goods shipments through vulnerable shipping lines such as the Strait of Hormuz and the Red Sea, although they have reduced their capacity during the current period of heightened political tension.

“Global (re)insurers active in the region face heightened exposure from the conflict and Iranian attacks, but war exclusions should materially limit ultimate losses, despite the potential for severe physical damage.

“The main underwriting vulnerability lies in marine hull and cargo, where accumulation risk arises if war-covered vessels are immobilised in ports or anchorages and struck in close proximity. In contrast, commercial property, hospitality, event cancellation and cyber face greater risk that losses are challenged as terrorism rather than war, driving high legal defence costs and occasional claim payments.

“Additional uncertainty stems from war-risk buy-backs, where insureds’ pay a premium to remove the war exclusion, and bespoke facultative covers, while the duration and intensity of the conflict remain key uncertainties influencing insurers’ ultimate loss exposure.”

However, if the conflict becomes a lengthy war the pressure will increase.

“A prolonged disruption or escalation would likely trigger sharper asset price declines, weaker investor sentiment and deteriorating macroeconomic conditions,” Moody’s explained. “Slower economic activity would undermine premium growth – a key support for the sector’s currently stable outlook – and intensify competitive pricing pressures.”

It would also open the possibility of capital erosion.

“Combined asset valuation losses and weaker underwriting margins could erode capital buffers and, if sustained, negatively affect the sector’s credit outlook,” the rating agency concluded.