The MENA region looks a somewhat different place from 18 months ago with the Arab unrest ushering in new governments in several territories. The changes in the region’s (re)insurance market have been more subtle, with stable rates seen in certain lines of business, while the stiff competition in some markets has meant a further shift from risk-adequate pricing. We speak to 10 major reinsurers in the region to seek a prognosis of the health of the reinsurance market, and the cures needed in a fast-changing environment.
Several events have dominated the recent reinsurance landscape, chiefly the unprecedented catastrophe losses in 2011 and the Eurozone crisis which will definitely keep interest rates low for some time to come. Closer to home, the Arab Spring has impacted the profitability of regional reinsurers who, in the larger national interest, have been quick to pay strikes, riots and civil commotion (SRCC)-related claims even as precise definitions of the events were up for dispute.
For one, the Arab Spring has put more pressure on the technical results of the regional players even if the insured losses of more than US$600 million may not be a crippling sum.
“The socio-political tensions are definitely impacting economic growth in the region and hence reducing the expected insurance premium growth. In this environment, technical results have deteriorated due to high moral hazard, and the devaluation of currencies also gives rise to inflation,” said Mr Ronald Chidiac, General Manager of Arab Re.
The civil unrest has not only affected the balance of power in the region, but is also transforming its overall risk landscape. And reinsurers and insurers certainly have to stay on top of these changes in order to manage their risk aggregation.
“The situation potentially creates new emerging risks, changing the exposure in our books. We need to be vigilant to discover those emerging risks and subsequently manage and underwrite them properly. That is the real challenge for the sector,” said Gen Re’s Managing Director Life/ Health (MENA & Cyprus) Mazen Abouchakra.
Terms improve slightly
However, reinsurers also see positives amid the challenging environment, with reinsurance terms growing tighter as more players seek to better manage their exposure. For example, the unrest in Tunisia and Egypt has led to the introduction of sub-limits for SRCC coverage in the region.
“Egypt and Tunisia have ultimately resulted in improvement in market terms and conditions in one way or another, and drew attention to issues that were taken for granted even as late as January 2011. For instance, the SRCC cover has now ceased to be an out-of-the-drawer free addition to the policy,” said Mr Mahomed Akoob, Managing Director of Hannover Re Retakaful.
Mr Gokhan Aktas, Milli Re’s Head of Foreign Inward Business, has also seen some improvement to treaty terms, pointing to “corrective measures” such as the introduction or increase in event limits for Nat CAT perils for instance. He added: “Commission rates have in some cases remained stable, whereas in other cases a slight drop has been witnessed.”
Looking at the macro environment, the effects of the major CAT losses in Asia last year may be limited as the region is not a major purchaser of CAT protection. Nonetheless, regional reinsurers will still be affected when buying property CAT retro and this would in turn be reflected in proportional property terms, said XL Re’s Manager (Middle East) Dermot Dick.
“Proportional property terms will also be affected with event limits, loss corridors, commission reductions and CBI cover limitations being introduced as we have seen in Thailand and India,” he added.
New opportunities
In some cases, peaceful protests in the Arab world quickly turned into a full-scale war, and the destruction seen in places such as Libya has indeed been regrettable. However, the rebuilding in the aftermath presents new prospects for the insurance sector.
“On the other hand, insurers and reinsurers look for these changes to bring greater opportunities in the long term as a result of the reconstruction operations and economic development,” said Mr Fahad Al-Hesni, CEO of Saudi Re.
And least of all, the Arab Spring has inadvertently led to a greater appreciation of sound risk management amongst insurance practitioners in the region.
“This has led to new topics and discussions with our clients. We have had to tackle new challenges, and together we found solutions to them. Awareness has been enhanced and there is greater demand for cover,” said Munich Re’s Client Manager (MENA Region) Rudolf Straass.
However, in the larger scheme of things, a lot more improvements are still needed to better align the interests of insurers and reinsurers in the region.
Pricing challenge
Like anywhere else, the quest for risk-adequate pricing remains a constant challenge. Some would argue that recent events in the region have in some cases contributed to curbing the downward trend in pricing, even if current rates are still far from adequate at a technical level.
“It does seem that things are improving, or at least not deteriorating any further. As an example, our internal analysis shows that the average rates in the UAE for fire and engineering have stabilised, albeit at relatively low levels, or are even slightly increasing again,” according to SCOR’s Chief Underwriting Officer Dr Cherif Chentir (Middle East & South Eastern Europe).
“The only noticeable move upwards to date has been experienced in Tunisia, where the market has signed an agreement to increase prices for property risks and has agreed on new tariffs and conditions regarding SRCC,” they added.
But at the end of the day, reinsurers generally concur that technical pricing does not happen regularly enough, and that these poor practices will prove detrimental in the long run.
“In many lines of business, original rates have reached levels which are not sustainable anymore and insurance as well as reinsurance companies are in the process of burning capital,” said Mr Lukas Mueller, Head Market Underwriter Middle East & Africa at Swiss Re. He added that Swiss Re is “very much concerned with this trend, and is closely monitoring and addressing it with all its partners.”
Evidently, there are many in the market which remain focussed on premium generation at the expense technical profitability, even though investment returns have diminished. Mr Chidiac of Arab Re believes that the unrealistic growth expectation of insurance companies in the region plays a major factor.
“Current prices are mainly set as per competition, to enable the companies to grow their top line in order for them to achieve the targeted premium growth. This is due to the fact that the majority of shareholders do not understand the insurance mechanism; thus they usually pressure for more top-line growth instead of profitability,” he said.
Gen Re’s Mr Abouchakra added: “In an emerging market environment, growth naturally plays a big role, however it should not be the sole market focus… the focus must be on understanding the risks and consequently executing exposure-based underwriting and pricing.”
Cheap capacity and expensive commissions
While certain reinsurers may fret over inadequate pricing of risks, the market dynamics in the region unfortunately feeds the opportunistic behaviour of some insurers who operate more as risk-traders than carriers.
With its strong growth prospects and benign catastrophe exposure, the MENA region continues to attract reinsurance capacity – with new entrants compensating for any “pull-back” in capacity by existing players. Over the last three to four years, the market has witnessed increased capacity offered by Asian reinsurers as well as new local players.
This trend is likely to persist and regional Arab reinsurers are bracing for more foreign capacity to be deployed here as international players shift away from the problems dogging Europe.
“Eurozone reinsurance capacity has to look now for alternative markets for growth and with the Middle East being one of them, it’ll put further pressure on an already overcrowded market,” said Mr Yassir Albaharna, CEO of Arig.
Another downside to the market is the over-dependence on reinsurance commissions to generate profits. The fact that some insurers behave as mere intermediaries, passing on the risk through reinsurance, means they rely on commissions rather than underwriting as a major source of income.
In a somewhat vicious cycle, wide access to cheap reinsurance capacity means that insurers have little incentive to price risks adequately, thus leading them to be risk averse as reflected in low retentions. And they rely heavily on ceding commissions which has till now provided solid revenue, further fueling demand for reinsurance which leads to more capacity entering the market.
“No one particular group in the chain is wholly responsible for the current state of affairs; it is a natural consequence of oversupply, but the root cause is unhealthy competition. Despite what many would argue, companies win new clients on the basis that they can reduce their insurance premium cost, so at the end of the day, cost is the main differentiator,” said Mr Albaharna.
Agents for change
Nonetheless, there are factors that could lead to an improvement in standards in the near future. Firstly, as more and more insurers seek ratings, the expectations of rating agencies would come to bear in the market.
“Rating agencies would require them to align their interests with all stakeholders, which means increasing their retention levels, taking a more conservative investment strategy and last but not least, working with a quality-rated reinsurance panel. This will maintain the need for reinsurers who provide strong expertise and are able to lead programmes in a technical way,” according to Dr Chentir of SCOR.
Secondly, reinsurers can also play their part by walking away from risks not technically priced or at least push for better alignment of interests. Part of it could be through reducing pro-rata capacity and offering more excess of loss which encourages better retentions.
Dr Chentir added: There is still some way to go on the pricing recognition of the exposures to large single risks and the capacities provided for those risks, but commissions are being increasingly linked to treaty profitability, and the use of per risk and per event limits being based on more stringent table of retentions.
Thirdly and most importantly is the crucial role of regulators to put in place a sound regulatory framework that fosters sustainable growth.
“Once the regulators in the Arab world seriously challenge solvency and ERM issues, local insurers will approach their reinsurance partners with different needs than before,” said Mr Straass.