The Insurance Authority (IA) has exempted reinsurance providers from rating requirements for a period of one year to ease the pressure on capacity, especially with the COVID-19 pandemic causing more stress.
Starting this month (January), insurers operating in the UAE writing reinsurance business along with (re)insurance pools and MGAs are exempted from the rating requirements imposed by the Insurance Authority (IA), market sources say citing a statement the Authority issued in November 2020.
The move comes as part of the government’s directives to coordinate and cooperate with the private sector and is in line with measures the IA has been taking to mitigate the economic impact caused by the COVID-19 pandemic.
The IA’s statement reportedly said that considering the circumstances that the reinsurance business is facing globally, it has been decided to allow the exemption for a period of one year, provided that it shall be applied as of the date of issuance of the statement.
The IA previously imposed new requirements that demand a minimum level of rating for reinsurance companies.
Reasons behind hardening reinsurance market
Mr Omer Elamin, president of Orient Insurance Group, referred to four factors that have resulted in tighter reinsurance terms and hikes in prices in the renewal season which begins in January.
He noted that some reinsurance providers have become stricter in accepting business in the region, while several regional players have ceased operations because of problems they faced. “Consequently, this has created stress on the reinsurance capacity in the UAE (re)insurance market.”
The large losses global reinsurance companies have incurred as a result of the COVID-19 pandemic, which some reports said are expected to exceed a record level of $200bn, and the losses resulting from the Beirut Port explosion last August, are estimated to have reached hundreds of millions of dollars, are rendering reinsurers stricter in accepting and renewing insurance contracts in the region, he added.
Another factor resulting in tighter reinsurance terms is the deterioration in investment returns due to the decline in interest rates which have fallen to unprecedented low levels (currently below 1%), Mr Elamin noted.
Overall, the renewal of 2020-2021 reinsurance agreements has witnessed notable stringency as a large number of insurers in the region have faced great difficulties in renewing their treaties whereas some were forced to accept stiff terms due to the lack of options or alternatives. “This has been reflected on the policyholders for insurance contracts renewed on 1 January, especially in the property insurance field where larger capacity is required. In some cases, the price increases reinsurers imposed have more than doubled, which is unfortunate as they take place at a time when the business sectors are suffering from the consequences of COVID-19 pandemic. Therefore, the increase in reinsurance prices is a burden on business owners and accumulates pressures on costs.”
Mr Elamin hailed the action the IA has taken to freeze the rating requirements on the reinsurance business. “Such requirements are to place more pressure on the terms and prices of reinsurance at this stage. However, the IA has responded favourably to the market and companies’ request to defer implementing the rating requirements for a year in order to ease pressure on insurers and policyholders.”
Time to set up regional reinsurers
Mr Elamin expects that the reinsurance market will continue to remain hard due to the lack of capacity in the region and the desire of reinsurance companies to cover the losses which have resulted from the continuous deterioration in prices over the past years.
Therefore, he emphasised the need today more than ever for setting up a national reinsurance company, “and perhaps regional reinsurance players in the GCC region which will be able to cover part of the insurance risks. The time is quite right as some international reinsurers are reluctant to work in the region or prefer to work under tough terms/conditions”.
Mr Elamin added that the current high prices guarantee generating reasonable profits for national reinsurers in the light of the need for such companies in the region. “Yet, it would be preferred to support the proposed regional reinsurer with a mandatory share (compulsory cession) of business by requiring national insurers to cede not less than 25% of the total portfolio to the national reinsurer, thereby ensuring the retention of a reasonable share of insurance premiums in the country or region.”
He also recommended that the minimum capital requirement of the new reinsurance company be not less than AED10bn ($2.72bn), contributed by both the public and private sector in addition to the insurers operating in the country or the region. “This will contribute to breaking the monopoly of international reinsurance companies in the region and shall plug the gap resulting from the cessation of most regional reinsurers.”
Mr Elamin expected that reinsurance companies would continue to tighten terms and prices for at least the next three years.