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MENA: Uncertain operating conditions to test (re)insurers

Source: Middle East Insurance Review | Mar 2018

The credit quality of (re)insurers operating in the MENA region is likely to be further tested over the next few years as a result of the increasingly uncertain operating environment, said A.M. Best in a report.
 
   Political, financial, and economic risks for (re)insurers operating in the region remain elevated due to ongoing geopolitical tensions in the region. Nevertheless, the ratings agency believes MENA countries present attractive growth opportunities for some (re)insurers.
 
   Low hydrocarbon prices in 2017 negatively impacted economies dependent on oil-and-gas revenues, and there was growing instability throughout the region.
 
   However, there is optimism for the MENA markets. “Despite the inherent challenges of operating in the region, there are opportunities for growth due to the low penetration rates compared with other emerging economies and mature markets, in addition to the continued introduction of compulsory covers such as medical healthcare,” said Mr Mahesh Mistry, Senior Director, Analytics, A.M. Best.
 
   The MENA markets remain fragmented with a large number of primary companies chasing premiums in small markets. Leading participants (generally the largest five in each country) tend to dominate market, controlling over 50% of total premiums, leaving the smaller companies to compete over the remaining premiums. 
 
   Over the past 10 years, the market share of the largest companies has grown gradually, and the agency expects their dominant positions to further strengthen in the coming years.
 
   The (re)insurance landscape is changing due to M&A activity. “Acquisitions have been driven by market access, eg, licensing, and distribution, with regional companies consolidating their positions as they seek to enhance their business profiles,” said Ms Yvette Essen, Director, Research and Communications, and report author. 
 
   Market consolidation in the MENA region is a positive trend, with many regulators actively encouraging mergers and, in some cases, providing incentives.
 
   Moreover, revenue generated from VAT, along with an expected strengthening of oil prices this year, will help fund infrastructure spending in the GCC and boost productivity. 
 
   The low penetration presents attractive growth opportunities for some (re)insurers in MENA. Some MENA countries, including Kuwait, Oman, Saudi Arabia, Egypt, and Algeria, had total insurance penetration rates below 2% in 2016, compared to the world average of 6.3%, demonstrating that the region also has some of the lowest penetration rates amongst emerging economies. 
 
   Despite the low penetration and premium retention levels, these indicators have been rising in recent years, driven by both regulatory changes and the desire of insurers to retain more risk.
The low penetration rates are partly due to the small size of the life risk cover, particularly for the GCC. At present, the expatriate population dominates the life market in the Gulf region, said the agency. M 
 
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