Strong primary insurance market growth and a perceived low exposure to natural perils will lure further regional and global reinsurance capacity to the MENA region, according to the 2015 MENA Reinsurance Barometer released by the Qatar Financial Centre (QFC).
However, unabated pressure on prices and the increasing share of largely self-retained personal lines business weigh heavily on the reinsurance sector’s growth prospects.
“Reinsurance capacity is expected to further expand in the MENA region. This is the main finding of the MENA Reinsurance Barometer which we have been publishing since 2011,” said Sheikh Salman Al Thani, QFC’s Chief Strategic and Business Development Officer. “The region’s strengths, namely robust insurance market growth, a vast pipeline of infrastructure and construction projects and a relatively low natural catastrophe exposure, still prevail over the challenges. Excess capacity, a lack of technical expertise and political instability are major challenges.”
The MENA Reinsurance Barometer is an annual survey based on in-depth interviews. In 2015, senior executives of 32 regional and international reinsurance companies, ceding companies and intermediaries operating in the MENA region were interviewed.
The 2015 edition shows that between 2009 and 2014, the region’s total non-life and life insurance premium volume expanded from about US$32 billion to more than $51 billion. Growth is driven by low insurance penetration in the region, with premiums accounting for just 1.4% of GDP in 2014, less than a quarter of the global average. However, as the region’s governments introduce compulsory insurance schemes in motor and healthcare, the gap is slowly narrowing.
In addition to the expansion of the personal lines business, massive spending on infrastructure and construction continues to be the most powerful driver of insurance and reinsurance demand in the region. More than $1.4 trillion worth of projects are currently underway in the GCC region alone.
Outlook
However, only 17% of executives polled still believe that reinsurance premium growth will outpace regional GDP growth over the next 12 months, down from 28% a year ago. The main reason is continued pressure on rates, combined with the rapid growth of personal lines, such as motor and health insurance, which are characterised by lower cession rates. All interviewees agreed that prices are below the five-year average, and 45% of them are convinced that they will decline even further. Nevertheless, 91% of participants expect reinsurance capacity in the MENA region to continue expanding, albeit more moderately than before.
The proportion of those expecting capacity to increase by more than 10% dropped from 18% to 3%, suggesting slower growth. Retention levels in the region remain low compared with other markets – on average domestic insurers in the MENA region cede 30% of their premium income to reinsurers. Only 42%, down from 65% of respondents, expect rising retentions over the next 12 months. As reinsurance capacity is abundant and inexpensive, there is little economic incentive to retain more, despite continued pressure from rating agencies, regulators and reinsurers to have “more skin in the game”.
In light of strong primary market growth and improving regulations, current reinsurance business sentiment remains mildly positive at 0.3, measured on a scale from -5 to +5 (very bearish to very bullish). In addition, long-term fundamentals, such as a young and growing population and low levels of insurance penetration support a positive outlook, offsetting negative factors such as continued fierce competition and exacerbating political instability.