Regional, Asia reinsurers set to ‘boost capacity in Mena’

By Santhosh V Perumal/Business Reporter

The Middle East and North Africa (Mena) region is all set to witness increased capacity expansion from regional and Asian reinsurers at the expense of more traditional sources from continental Europe, according to a Qatar Financial Centre (QFC) study.

“About 50% (up from 41%) of respondents believe that the share of regional and Asian reinsurance capacity will continue to increase, at the expense of traditional Western capacity, said the QFC’s first Mena Reinsurance Barometer, which was unveiled in Monte Carlo. These inroads are expected to be driven by continued strong capital formation in emerging markets and unabated desire for diversification among Asian reinsurers, it said.

The report found that Asian reinsurers are also broadening their footprint in the Mena region, following their domestic clients, similar to the global expansion of Japanese reinsurers a few decades ago.

In addition, some Arab reinsurers are returning home following severe losses during the Asian catastrophe of 2011, while another is the current political uncertainty, prompting some Western players to reduce their involvement, adding to the retrenchment prompted by profitability concerns.

On average, Western reinsurers are believed to boast a market share of about 50%, while Asian and regional players account for 30% and 20% respectively.

The barometer also found that retention levels in the Mena region remain extraordinarily low compared with other markets - on average domestic insurers in the Mena region cede 33% of their premium income to reinsurers.

In the Mena region, about a third of non-life insurance premiums are ceded to reinsurance companies, it said, adding the total estimated non-life reinsurance market volume for 2012, accordingly, amounts to about $12bn.

About 68% (up from 52%) of the respondents expect aggregate retention rates to increase by up to 10 percentage points over the next 12 months, citing mounting pressure from reinsurers and regulators, who expect domestic insurers to have more ‘skin in the game’.

Some respondents also viewed that more insurers are trying harder to make money on risk retention in the light of a protracted low-yield investment environment, the report said, adding there has also been a gradual shift towards non-proportional reinsurance.

However, the trend towards higher retentions is mainly limited to the larger players as well as to personal lines business in motor and medical insurance. Retention levels of the average commercial line insurers remain very low, more often than not below 10%, the report said.

Cession rates in the GCC (Gulf Co-operation Council) countries tend to be highest, at an average of 40%. This reliance on reinsurance reflects the dominance of a direct insurance business model based on commission and investment income which, in turn, is driven by abundant reinsurance capacity and a general lack of technical expertise needed to retain more risk.

Even though cession rates in the GCC have been declining, they remain high compared with other countries of similar wealth and the global average of about 10%.

“The declining trend in the GCC region is primarily attributable to above-average growth in personal lines such as motor and medical insurance. These lines of business display significantly lower cession rates than more volatile commercial segments of business,” the barometer said.