The insurance sector in the MENA region is fast approaching an inflection point that could cause many players to wonder what their real purpose should be in the tough years to come.
The main focus of this existential dilemma is the return of stagflation, last see in the 1970s. From a superficial perspective, stagflation will be manifest by runaway inflation and constrained growth.
The inflation component is already being felt widely across the region with soaring food prices caused largely by Russia president Vladmir Putin’s invasion of Ukraine. Central banks in MENA will probably be forced to follow the lead set by the US and raise interest rates to a greater or lesser extent.
While this may offer the prospect of more dynamic opportunities for the asset managers of insurance funds, their increased returns will probably not offset the increased pressure on the underwriting side of the business.
In a recent Swiss Re sigma report, ‘Stagflation: The risk is back, but not 1970s style’, the reinsurer said, “P&C insurers are most exposed to the inflation shock, which will increase claims severity. In the near term, property and motor will likely be hit hardest, as price rises in construction and car parts outstrip those in the wider economy.”
The immediate picture looks less bleak for life and health insurers, according to the reinsurer. “For L&H insurers, sustained high inflation has primarily indirect effects, as rising interest rates support profitability. Investment results benefit as bond portfolios roll over into higher yields, while the profitability of saving products with guarantees improves. The nature of fixed-benefit products insulates them from claims inflation, though indemnity-based health insurance is exposed to claims pressure in the near-term.”
But the medium term looks fraught. “We expect higher inflation to erode consumers’ disposable incomes and the value proposition of (in-force) saving policy benefits, resulting in higher rates of lapse and surrender. This would decrease societal resilience to mortality and health risks,” said the sigma report.
In recent years the MENA region has been focused on growing the penetration of life insurance, which is remarkably low, largely because of historical factors. Perhaps the next few years will not be the best time to accelerate such efforts as target customers are increasingly forced to choose between paying for essentials, like food and clothing, and discretionary expenses like life insurance premiums.
The region has already seen some moves towards greater consolidation of insurers in markets that are overcrowded. The stagflation-induced dramas that are about to be unleashed in MENA could prove to be an extra incentive to accelerate further consolidation measures.
On the upside, there will be winners from this new, more hostile, insurance landscape. They are likely to be players that focus on quality of service and cost reduction through the smart application of technology.
The one constant throughout all of this change will be the need to think about what customers want to buy rather than what insurers want to sell. Insurers with the best understanding of the customers will be the inevitable winners.
Paul McNamara
Editorial director
Middle East Insurance Review