Demand for reinsurance in the GCC will likely remain higher in commercial lines, such as marine, cargo and engineering, than in personal lines, said Moody’s in a report.
This is due to the relatively unpredictable nature of commercial claims compared to personal lines, where loss ratios typically follow a low-risk, high-frequency pattern, said Moody’s. Even allowing for profit commission payments from reinsurers to their cedants, the ratings agency expects commercial reinsurance to remain a more attractive segment for reinsurers than personal lines over the near term.
In the report, “GCC Reinsurance: Rates continue to soften”, Moody’s said primary insurance rates in the GCC region have continued to soften in 2014, particularly in Qatar. This ongoing trend, together with overcapacity in the global reinsurance market, will likely put further downward pressure on reinsurance rates within the region.
Use of reinsurance in the GCC is generally significant, with premium retention levels by insurers in the Middle East often low – on average 63%, compared with around 90% for some of the largest global insurers, as a result of providing insurance coverage to large hydrocarbon-related companies. The potentially high claims hydrocarbon-related projects expose insurers to, as well as the specialist insurance skills required to effectively underwrite such risks, makes them a natural choice for ceding to reinsurers, but also exposes reinsurers to the impact of lower current oil prices, said Moody’s.
It noted that declining oil prices in the region could lead to lower investment in new commercial projects, which would in turn reduce demand for reinsurance coverage on such classes. Moreover, geo-political uncertainty in the region remains high, which could have some spillover effects in the GCC.
Historically, many GCC (re)insurers have only carried relatively modest levels of net underwriting risk on their balance sheets relative to their capitalisation. As a result local reinsurers’ capitalisation is stronger, with gross underwriting leverage (GUL) around 2x, than those of the largest global reinsurers, which have GUL of around 2.6x.
However, local reinsurers tend to remain concentrated in terms of geography and, to a lesser extent, by line of business.
Conversely, most highly rated global reinsurers benefit from substantial geographic and lines of business diversification. Some of the larger insurers in the region are also broadening their reinsurance offerings and becoming, at least in part, direct competitors to local reinsurers.
In absolute terms, the premium contribution from the GCC region for the largest global reinsurers remains only very modest, accounting on average for less than 5% of their premiums.