DOHA: The influx of reinsurance capacity in the Mena region and the prevailing competitive market conditions has started putting pressure on the technical performance of regional reinsurers, a report said.
The low level of insurance penetration seen in many Mena countries, combined with the robust, albeit deteriorating, profitability achieved by the leading primary insurers, has made the region a target for international and domestic reinsurers, explained A M Best in its new report “Overcapacity Weighs on Technical Performance of Reinsurers in the Middle East & North Africa”.
The report examines how insurance markets in the Mena region have grown significantly over the past decade. Mena insurance premiums surpassed $50bn in 2014.
Mena markets such as GCC countries, are perceived to have relatively benign exposure to natural catastrophe events, allowing reinsurers to establish geographically diverse underwriting portfolios without exposing themselves to increased earnings volatility.
The report noted that the introduction of financial hubs such as Qatar Financial Centre (QFC) and Dubai International Financial Centre (DIFC), along-side well-regulated offshore centres, including Bahrain under the Central Bank of Bahrain, have helped open the market and encourage international players to establish a physical presence in the region.
While the size and the sophistication of the Mena insurance market has increased notably over the past decade, it remains developing and dependent on international reinsurance support, with local and regional reinsurers generally acting in a follower capacity. Despite a period of economic slowdown in the region following the 2008 financial crisis, growth and productivity has gradually improved over the past three years, albeit remaining below pre-crisis levels.
Infrastructure projects, as well as consumer and business confidence, has rebounded to a stronger level, the report said.
The resulting expansion in infrastructure and commercial risks, which typically require extensive reinsurance support, has fuelled increased demand for the reinsurance sector.
Whilst both new entrants and established participants have been faced with the prevailing landscape of overcapacity and soft premium rates, their profiles and performance vary considerably. The profiles of established participants typically benefit from local government support, whether via state ownership or through local legislation that generates compulsory cessions from the direct markets.
Close proximity to clients is increasingly being recognised as a fundamental mechanism for (re)insurers to better understand the characteristics of the markets they operate in and ultimately the risks they underwrite.
A M Best also examines how domestic Mena reinsurers can be split into two distinct groups — established participants and new entrants — and whilst both groups have been faced with the prevailing landscape of overcapacity and soft premium rates, their profiles and performance vary considerably.
For Mena reinsurers, the most severe losses tend to emanate from commercial risks, including property, engineering, marine and energy lines. In particular, large commercial property losses , such as the 2014 Almarai dairy fire in Saudi Arabia, have been drivers of volatility in technical performance. This particular event not only generated a meaningful property loss for the market but also a material business interruption exposure.The Peninsula
