The Burj Khalifa (right) is seen from the Dubai port Mina Rashid. Mena insurance markets generated more than $35bn of premiums in 2013, with the main insurance markets being the UAE, Saudi Arabia and Turkey, according to a report.
By Santhosh V Perumal/Business Reporter
The Middle East and North Africa (Mena) has “significant” income-generating potential for the reinsurers and the Gulf region is perceived to be benign to catastrophe events, allowing them to diversify portfolios and reduce volatility, according to a study.
Although there are indications that some reinsurers have more recently been seeking to reduce their exposure to the GCC (Gulf Co-operation Council) region, plenty of reinsurance capacity remains in the market, A M Best said in its study.
Furthermore, the expansion of players operating within the Indian subcontinent, the Asia-Pacific territories and Africa has brought additional capacity to the Mena market, it said, adding primary insurers’ dependence on reinsurance support remains high among companies based in the region.
“Despite a gradual increase in premium retention from primary insurers, the markets are expected to remain dependent on foreign reinsurers in the foreseeable future,” the rating agency dedicated to the insurance sector said.
Mena insurance markets generated more than $35bn of premiums in 2013, with the main insurance markets being the UAE, Saudi Arabia and Turkey. Within the Mena markets, the vast majority of high-value commercial risks such as energy and infrastructure are ceded to the international reinsurance market, with primary insurers either fronting these risks or retaining very little.
Despite the region’s economic slowdown from 2008 to 2012 (owing to depressed world financial markets), potential growth in commercial risks is expected to remain and continue to create opportunities for reinsurers, A M Best said.
Finding that the spending on infrastructure has increased over the past year, along with high levels of consumer confidence, the report said this has led to a “significant rebound” in asset prices, with equity and real-estate markets showing signs of improvement.
“These developments, in addition to the introduction of further mandatory cover, will continue to fuel demand within the insurance sector,” the study said.
Mena’s insurance markets are still young and depend on international reinsurance support, with local and regional reinsurers generally acting as “followers” in such markets.
Cession rates vary significantly among Mena insurers, although in general the level of business ceded to reinsurers has gradually decreased in the past few years, it said, adding AM Best’s analysis of 152 companies based in the GCC countries shows that in 2002 more than 60% of direct premiums written were ceded to reinsurers.
However, in 2013 cession rates for companies in this data set were less than 40% of gross premiums.
The Mena market largely utilises proportional reinsurance, although there has been a gradual shift toward non-proportional cover in recent years. Within the region there is extensive use of bouquet treaties, whereby most non-life lines are placed together under the same treaty to service group multi-risk accounts.
This makes pricing the treaty for the whole portfolio more critical, factoring in both under- and over-performing lines. In most cases, healthcare is placed separately, the report said.
In the medium term, Mena insurers are under pressure to maintain greater focus on technical profitability, given depressed investment returns.
There is pressure from reinsurers to increase rates, enforce stricter terms or reduce commission levels, which will further encourage companies to concentrate more on gross rather than net profitability.
Furthermore, insurers are taking active steps to improve profitability, with increased retentions as one measure.
Retakaful operators represent an important sector within the Mena reinsurance market. However, as these operators tend to be new entrants, they are finding it difficult to establish themselves.
Creating a balance between market franchise and profitability has been a significant challenge to the retakaful sector, the report said.