The Middle East and North Africa (Mena) region continues to be an attractive reinsurance growth market thanks to robust economic conditions, but the strong fundamentals are being partially offset by fierce competition and political instability, according to the Qatar Financial Centre.
“Overall, reinsurance business sentiment in the Mena region remains positive in light of strong long-term fundamentals, such as a young population, robust GDP growth and a significant catch-up potential in the insurance markets,” QFC said in its first Mena Reinsurance Barometer, which was unveiled in Monte Carlo.
Measured on a scale from -5 to +5 (very bearish to very bullish) sentiment stood at 1.2, the report said, adding it is expected to improve to 2.4 by summer 2014 as terms and conditions tighten further and as strong fundamentals prevail over current political uncertainties.
Finding that reinsurance premium growth will continue to outpace regional GDP growth, it said “a further inflow of capacity is expected as the region remains an attractive high growth, low-catastrophe market with positive effects on overall portfolio diversification.”
At an inflation-adjusted growth rate of 4.8% per year during 2007-12, the region’s economies grew markedly faster than the global average (3.3%). Qatar’s GDP growth stands out, primarily reflecting the expansion in liquefied natural gas (LNG) capacity. The country is expected to remain the region’s “most vibrant economy”, though growth is set to fall to single-digit levels as current LNG development programmes near completion, it said.
Finding that one of the most striking features of the Mena insurance market is an “extraordinarily” low insurance penetration - premiums in 2012 accounted for just 1.3% of GDP, a fifth of the global average, it, however, said this gap is narrowing.
“This penetration gap is believed to be a major long term and structural driver of insurance and reinsurance market growth in the region,” it said.
Between 2007 and 2012, total non-life and life insurance premium volume in the region expanded from about $26bn to more than $44bn. At a share of less than 16%, life business continues to play a relatively minor role though it grew faster by 9.1% than the 7.6% in non-life market, according to QFC.
“For the Mena region, I expect reinsurance exposure to outgrow GDP, fuelled by continued investments into construction and infrastructure. But, due to fierce competition, I expect premium growth to fall short of the increase in exposure,” Nabih Massaad, Head of Doha Operations, Q-Re, said.
The economic outlook for the Mena countries has become more “homogeneous”, the barometer said, adding for 2013 and 2014 the IMF expects GDP growth in oil-exporting countries to slightly exceed the pace of expansion of oil-importers (3.5% versus 3.2%). Overall, near-term regional economic growth is expected to equal the global average.
Although the terms and conditions have continued to tighten over the past 12 months, a trend which started in 2011; it said to some extent this explains why Mena reinsurance market remains attractive despite relatively low rates.
Observing that the share of interviewees citing loose terms and conditions declined from 48% to 38%, it said this change in assessment primarily reflects the aftermath of the Arab Spring and an increasing awareness of the region’s catastrophe exposure.
The region’s relatively low natural catastrophe exposure (except for Turkey, Iran and parts of Northern Africa) is the second most frequently mentioned strength.
In addition to compulsory insurance schemes in motor and healthcare, massive infrastructure and construction spend continues to be the most powerful driver of insurance and reinsurance demand in the region.
As of August 2013, more than $685bn worth projects were underway in the Gulf region alone, it observed.
A strong pipeline of infrastructure and construction projects ranks third, even though the flow of projects in most countries (except for Saudi Arabia and Qatar) has slowed.