The Qatar Financial Centre Authority recently published its annual MENA Reinsurance Barometer, providing a detailed survey of the MENA reinsurance market, which produces an estimated US$13 billion in non-life reinsurance premiums (approximately 7% of the global total).
As ever, the survey is thought provoking in its examination of the market outlook, relevant trends, business sentiment and the prospects for future growth. This year’s survey was carried out against the backdrop of further declines in oil prices and continuing regional political and security risks. The GCC states are expected to experience the most marked slowdown in economic growth, with medium term rates of expansion projected at 2% per annum.
Insurance penetration remains very low in the MENA region – non-life and life premiums in 2015 accounted for just 1.6% of GDP, just slightly more than a quarter of the global average. However, this gap is narrowing.
In the MENA region, it is estimated that about 29% of non-life premiums are ceded to reinsurers. However, the survey found that there are considerable regional differences in reinsurance buying habits. Cession rates in all the GCC states (except for Saudi Arabia) are above the MENA average, reflecting the dominance of an insurance business model that is based on commission and investment income. Local cedants benefit from competitive reinsurance rates and so there is perceived to be little encouragement to invest in technical expertise that would allow them to retain more risk.
The survey provides a very accessible SWOT analysis of the MENA reinsurance market.
S – Market strengths
The greatest strength of the reinsurance marketplace remains the region’s continued insurance market growth. In addition, the regulatory environment (once seen by many as a weakness) was cited by many participants as a strength as local regulators seek to tighten standards. SAMA was highlighted as an example of a regulator seeking to impose more robust standards, including solvency requirements, and many viewed tightening regulation as a trend spreading across the wider region. That will be a welcome development as it will result in more disciplined underwriting and ultimately, this will benefit the market.
Another strength that was emphasised is the low natural catastrophe exposure. Excepting Turkey, Iran and Algeria, the region’s low exposure to natural catastrophes makes the region very attractive from a global diversification perspective. However, it was cautioned that this may not always remain the case with climate change being cited for a number of changing weather- related losses in the region.
W – Market weaknesses
Excess capacity remains the greatest perceived weakness, resulting in fierce competition and unrealistic pricing. A lack of local technical expertise continues to be seen as a serious weakness while the economic slowdown has had a considerable impact on a number of classes of business including marine hull, engineering and motor.
O – Market opportunities
A number of respondents view the declining oil price as a major opportunity for insurers in oil-exporting countries. The thinking for this is that those countries will need to diversify their economies so that they are not so dependent on oil revenues. This should produce a more diverse and sophisticated risk landscape which, together with the declining role of the public sector as the ultimate risk bearer, should present very real opportunities for insurers.
Low penetration of the MENA insurance markets continues to be seen as a major opportunity. Product innovation is viewed as the third major opportunity, especially in the areas of cyber, political, trade credit and liability risk where penetration rates across the region are very low. The arrival of Lloyd’s of London in Dubai may be a stimulus to developing these niche lines of business.
T – Market threats
As previously, political risk is seen to be the most substantial threat to the MENA reinsurance markets. Dependency on oil prices ranked a close second as many view the decline in oil prices as the new “normal”. The prolonged softness of the reinsurance market and erosion of market discipline also continues to be seen as a threat although it was tempered by a view that underwriting conditions have shown improvement in a number of markets across a number of lines of business.
Technical market outlook
The survey interviewees all considered reinsurance prices in the MENA region to be below the average of the past three years. The potential consequence is that there is a real danger that the market cannot absorb even a series of mid-sized losses, never mind a major loss. The survey indicates that there is a limited turnaround in pricing expectations, reflecting a number of major losses which were largely absorbed by reinsurers. However, this turnaround is not uniform across the MENA region and non-proportional rates are still thought to be under pressure.
In tandem with pricing, reinsurance terms and conditions are perceived to have loosened over the past two years, with broader coverage available at the same pricing. The survey participants did not see this trend continuing, with a majority anticipating a hardening of rates following recent losses and with some local regulators requiring greater pricing discipline.
Overall, technical reinsurance profitability was thought to be below the average for the last three years. This is largely due to proportional treaty business, which generally has less attractive reinsurance terms and conditions, a trend towards higher attritional losses and rising operational expenses. Survey participants felt the outlook was brighter for facultative and non-proportional business as a result of international pricing standards and the absence of major natural disasters.
Growth in specific lines of business
As previously, medical insurance continues to be perceived as the fastest growing business line over the next year, driven by the introduction of new, and the expansion of existing, compulsory insurance requirements. Motor is considered to be the next line of business with the most growth potential. Liability insurance ranks third, reflecting, amongst other things, an increasing trend towards litigation against professionals. Liability insurance now outranks construction and engineering in terms of growth potential and is perhaps reflective of the construction boom waning and rates continuing to erode.
By contrast, the two slowest growing lines were said to be marine hull (reflecting decreasing trading volumes) and property insurance (which is now highly commoditised).
Spotting the trends
The survey participants considered that the most significant trend that they are witnessing is the transformation of the economies of a number of oil exporting states to more diversified economies. This is likely to lead to the private sector playing more of a role as governments face the need for fiscal tightening. In addition, the range of insurable assets is likely to increase as a result of efforts to broaden the base of these economies, for example by boosting the services and manufacturing industries.
Survey participants also highlighted a likely trend in increasing foreign market participation (for example, in Iran) and a lowering of the barrier to foreign direct investments (for example, in Saudi Arabia).
The third most frequently mentioned trend is the adoption and implementation of more effective regulatory frameworks in the region ranging from risk-based solvency regimes to specific measures aimed at enforcing more disciplined underwriting practices. This is a much needed development and more needs to be done to make existing regulatory frameworks (and the enforcement of those regulations) more effective. At the moment, there is a spectrum of regulatory oversight across the MENA region ranging from some very developed regulatory regimes to others that are “under development”.
Business sentiment
Despite continued political and security concerns and the economic slowdown following the sustained fall in oil prices, overall business sentiment is strengthening, based on the responses from the survey’s participants. The outlook for 2017 is reported as being positive as the pressure is eased on reinsurance rates, terms and conditions and the re-emergence of Iran (with its $8 billion insurance market) is seen as offering real prospects for reinsurers.
Ms Susan Dingwall is Partner while Mr Martin Schneider is Associate, both of Norton Rose Fulbright LLP.