Some of MICC’s reinsurance members share their experience of the July renewals and how they are dealing with the prevailing soft market, expected to continue into 2016 as competition stiffens.
Q: What key trends did you see during the 1/7 renewals?
Ronald Chidiac: Basically, the renewal of 1/7 was on expiring terms and conditions. The supply is still outpacing demand; we have witnessed an increase in capacity while the new business remained very limited. At the same time, reinsurers’ rating has become a major requirement for placing business.
Yassir Albaharna: In July and not contrary to prior expectations, insurance market results did not dazzle anyone. Some regions recorded a more mediocre output than others, but even then, no material changes in the reinsurance terms were introduced. This was in line with primary rates continuing their soft pattern and with the tendency of new capacities being introduced here, there and everywhere. The renewal period marked yet another challenging season for everyone, and only a few could surpass its difficulties holding to their convictions regardless of the external market pressure.
For those stuck on the uphill battle, it is clear that margins were not there, and the negative outcome will not be turning around any time soon. It is rather painful to witness such developments and an enduring difficult time period.
To alleviate the burden on companies, some pursued business in the region as means to diversify, but whether or not this will be sustainable on the long haul is an entirely different question altogether. Given such circumstances, in principle, the core focus must shift back to those assuming the role of a leader. What should be emphasised are the need for improved terms and acknowledging that stiff competition no longer translates into giving someone a run for their money. After all, leadership is not just a tag or a brand name attached to a contract, but rather, a privilege given to safeguard everyone’s interest, and hence the sector’s.
Mahomed Akoob: Continuation of the soft market and availability of (new) reinsurance capacities. On the takaful side, many operators still seem indifferent when it comes to choosing between retakaful and reinsurance.
Fahad Al-Hesni: The Middle East market remained generally soft to flat during the 1/7 renewals. Proportional capacities generally remained stable across the region. The commission level in proportional treaties witnessed a slight increase in better performing treaties, whereas it remained flat for treaties with combined ratios higher than 100%.
Non-proportional treaties have generally seen price reductions between 10% and 15% on a risk-adjusted basis.
Reinsurance capacity in the region remained high and most of the programmes were placed with good rated securities.
Q: What key issues do you expect to see or hope to see in the upcoming 1/1 renewals?
Ronald Chidiac: We hope to see thicker terms and conditions, better technical pricing and enhanced regional cooperation among different players. However, we know this is difficult to implement and as long as the current market dynamics are in play, we do not expect major changes for 1/1 renewals, especially in the absence of low payouts for Nat CATs on a global scale, and provided international and regional players continue to perform steadily.
Yassir Albaharna: Emotional involvement in business favours no one, but the effect of transparency, exhausting or not, can be contagious. Although it is unlikely for new material changes to emerge prior to the January renewal period, and although it is quite early to discuss at present, it is imperative for all entities involved to be completely transparent in their dealings and dialogue, especially because numerous new entrants claim their spot in the market, offer new capacities, and deplete the options for even the most seasoned underwriter.
It is in fact fascinating how the insurance and reinsurance market can still squeeze within its framework the abundance of new capacities. Instead of constantly bobbing and weaving whilst absorbing intermittent and growing exposures, the industry must divert focus into more rewarding undertakings, other than those seeking expansion for volume’s sake only. Rather, containment within areas of expertise could provoke an effective course of action in suppressing the unnecessary and rather trivial growth in capacities in a market environment, prone to be labelled nothing more than “overrated”.
Along these lines, the January renewal window will put additional pressure on the industry in the region. It would exemplify the vigour and fortitude required, not necessarily to excel but to actually and somewhat comfortably meet minimum requirements and attain peace of mind.
Nowadays, the process of maintaining existing commitments is like walking on eggshells, never knowing when the next metaphorical left or right hook might sneak around any given corner and land a square to the jaw. Each (re)insurer, including Arig, will require careful formulation of the future strategies to sustain the negative developments in the international scene and earn a reasonable reward for the trials and tribulations ahead.
Mahomed Akoob: Without a “shock event”, we expect to see further deterioration in primary pricing and more aggressive reinsurance pricing. We hope for the opposite and, even though it would be very sad thing, perhaps direct regulatory action on the primary market side.
On a positive note, the Saudi Arabian Monetary Agency has taken notice of the performance trend and initiated discussions with the market to improve underwriting. We expect this to have a direct impact on the market and hope to see it by the upcoming 1/1 renewals. We also hope other regulators might, in their own way, follow suit.
Fahad Al-Hesni: In the absence of any major losses, 1/1 renewals in 2016 are likely to be similar to those in 2015. The soft market condition might continue with limited potential growth in primary premiums, as all reinsurance companies operating in this region are anxious to grow their top lines. There are indications of some companies in the region buying more reinsurance in 2016 due to capital constraint.
Q: What is our greatest concern in terms of business outlook?
Ronald Chidiac: Competition in the market has hit severe levels, and future prospects do not show any remission. With the absence of sound regulations and the continuous competition on the prices and terms’ levels, the industry is expected to continue witnessing a decrease in technical returns and further destruction of value. Not only is regional capacity not in line with demand, but equally, the retention of many regional insurers is not harmonious with their equity. These players are acting more like brokers, placing most high risks with reinsurers and benefiting from high reinsurance commissions.
Shareholders are also claiming higher returns on their investments. This is making things worse by intensifying competition and driving management to focus mainly on temporary results and market shares. And as long as top managers are being remunerated on the new premiums and business they realise, many will not care about putting extra efforts to create values and drive their companies (and the market) to new highs. We are indeed suffering from the lack of proper corporate governances. The high level of ego is also another major concern that is preventing regional cooperation among market players, whether through mergers of capacities or through better communication and exchange of expertise and know-how.
Yassir Albaharna: It is no easy endeavour to foresee or predict a change on the horizon in the foreseeable future. It is quite disheartening to prepare for the worst in order to see a movement in the opposite direction, i.e. to embrace non-cosmetic changes instead.
The sector is ailing, and investment returns which could subsidise technical results are non-existent. And just to add some extra salt into the wound, rates continuously spiral downwards. Not helping are the similarly declining oil prices and the unstable regional geopolitical agendas which inadvertently further affect the economy.
Thus far, a significant turn of events such as an increased investment return has eluded the market. Without pragmatic and market specific adjustments and without realigning the traditional view of reinsurance as a global standard, the level of neglect would spread, and the margins would end up capitulating to new lows. Moreover, without aligning the underwriters’ holistic approach with market specific strategies which would be more realistic in the long term, the tenuous and tedious predicaments ahead would only exacerbate, to say the least.
Under the circumstances and whilst carefully considering all of the above, a mid-side, well-established organisation such as Arig could genuinely venture forward with a clear understanding and without denying the realities of the business environment.
Mahomed Akoob: The markets seem to have crossed the boundary of aggressive competition to an unreasonable and self-destructive territory. The greatest concern would be primary companies going out of business, leaving their insureds/ participants twisting in the wind.
Fahad Al-Hesni: Due to the soft market, it is evident that there is pressure on the reinsurance margins at this moment. This will definitely create pressure on the expenses of the companies operating here.
The increasing number of large fire incidents remains an issue for players in this region, and the key to success will be diversification in various lines of business in the coming years.
In addition, political violence continues to threaten the industry at this moment. Though most of it are excluded in reinsurance treaties, these are definitely having a negative effect on the business.