Against the backdrop of the global softening of reinsurance rates, the MENA region is still seen as an attractive market as it is profitable with low insurance penetration, and benign in terms of Nat CAT risks. As such, (re)insurers seeking greater diversification and excess capacity look towards the region, especially with the recent shift in the trend of doing business at a distance to recognising that moving closer to the market is necessary.
In a market briefing in Dubai, Mr Mahesh Mistry, Director, Analytics at A.M. Best Europe, said that a range of factors, ranging from the future lifting of sanctions on Iran and low oil prices to compulsory cessions in the North African market, liberalisation and the development of the DIFC into a regional hub, has created a greater competitive landscape leading to lower margins for domestic players.
He considers the arrival of the Lloyd’s market at the DIFC as a major milestone in the growth in competition, and said that international players are important in providing a global presence, technical expertise such as modelling capabilities, and economies of scale.
Tough market
Mr Mistry said that the MENA reinsurance market is facing tough times, which will affect regional reinsurers in particular. While some opportunities remain, strong underwriting discipline and prudence are important to tap them.
He said: “I wouldn’t say the market is in bad shape, but I think it is a tough market out there for reinsurers. They need to be disciplined in what risks they are underwriting and ensure that growth is controlled. With the level of competition entering the market, they need to be more selective about what risks they put on their books, and the profile they wish to take to have better control of the risk. At the same time the market continues to be soft.”
The MENA region has the lowest premium retention rates compared to other regions. A recent increase in retention rates, which reached over 65% in 2014, has been due to the retail (motor and medical) business following the introduction of mandatory healthcare but beyond this, big-ticket premiums continue to be ceded out entirely.
International and regional reinsurers
Highlighting how international reinsurers play a key role to supporting growth in the region, Mr Mistry noted that they often lead on insurance programmes, and carry the technical expertise and capacity that domestic insurers have come to rely on.
While regional reinsurers would not have the same capacity and ability to absorb losses, they could still tap opportunities in niche business areas such as SMEs, which the larger players may not wish to go into.
Mr Mistry also said that while most established regional reinsurers are government-owned, have participation from local insurers and enjoy compulsory cessions, new reinsurers are facing a slowing economy, softening rates and a low interest rate environment which are not conducive to helping them offset losses with investment income. Qatar Re has been the only MENA player which has made it into the global Top 50 reinsurers’ list, while the rest have been generally under-performing.
However, reinsurers are still generally well-capitalised compared to some primary insurers, due to their ability to handle risk and capital management better. Their ratings also remain generally secure, and those companies which can demonstrate more robust, better margins and underwriting discipline would even see their ratings improve over time.
Even as he expressed hope that rates would increase, he noted that MENA reinsurers are looking further afield for business, such as creating contacts in Asia and Africa. This could be a good strategy but given the uncharted territory, they would need to make sure the risks are priced appropriately.
Overall, he concluded that the MENA reinsurance market environment remains challenging and the market size of regional reinsurers is still small compared to their international counterparts. For the younger players, growth over performance remains a key challenge as they seek to justify their initial start-up capital. The strategies of senior management would be key to determining the eventual success of their companies.