While the short-term impact of political instability and related economic and financial systems risks can be absorbed by most A.M. Best-rated insurers in the region, longer-term exposure ultimately requires enhanced enterprise risk management capabilities and practices.
In a new report, “Low Oil Prices and Political Instability Provide Testing Times for Middle East And North Africa Insurance Markets”, A.M. Best noted that while some insurers have benefited from the regional unrest, taking advantage of opportunities such as an increasing demand for political violence cover, an understanding of the risks of operating in countries experiencing currency fluctuations, illiquid asset classes, investment market volatility, high inflation and business interruption is only one part of the challenge.
The real test of an insurer’s risk management approach is the strength and agility of the controls, practices and measures that it puts in place to prevent issues triggering earnings and capital volatility, with the strongest insurers being those that go one step further and consider “what if” scenarios and create contingency plans that target the unexpected.
Significant growth in gross premium revenues in the region over the last decade has stemmed from an increase in insurable risk, partly driven by government and private-sector investments in energy, infrastructure and industrial development projects.
Mr Mahesh Mistry, Director, Analytics, said: “While local insurers often only have profiles and balance sheets which support them taking a small net share in large property and engineering risks, they have benefited from strong inward commissions from regional and global reinsurers that bear the majority of these risks. Consequently, whilst a slowdown in new energy, property and construction risks may not impact the net written premium base of most domestic insurers, given their extremely low retention levels on these risks, technical profitability may be subject to deterioration.”
For insurers operating in the region, the implications of the recent political instability have been varied. Whilst some countries, such as those from the GCC, have remained relatively immune to long-term political instability, other countries have experienced significant political instability, reforms and social unrest.
“For most MENA insurers, political instability and social unrest have not directly impacted their operations or performance over the short term. However, the political strains that have arisen in these countries have resulted in heightened economic issues as well as financial market volatility,” Mr Myles Gould, Senior Financial Analyst, added.