Overcapacity Weighs on Middle East, No. Africa Reinsurers: A.M. Best Report

September 22, 2015

A special report from A.M. Best notes that the “low level of insurance penetration seen in many Middle East and North Africa (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. MENA insurance premiums surpassed $50 billion in 2014, with the main markets being the United Arab Emirates, Saudi Arabia, Iran and Turkey.”

Best explained that “many MENA markets, such as those of the Gulf Cooperation Council 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.”

Best’s report – “Overcapacity Weighs on Technical Performance of Reinsurers in the Middle East & North Africa,” however, indicates that the “influx of reinsurance capacity in the region and the prevailing competitive market conditions that have grown ever fiercer over the past three years have begun to place pressure on the technical performance of regional reinsurers.”

Although 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,” Best said.

Mahesh Mistry, director, analytics, noted that while “some reinsurers have exited the market, but the number of new entrants is far greater than those leaving. Reinsurance capacity – both from international and regional reinsurers – remains well in excess of local demand, resulting in the continued exacerbation of the current competitive pricing environment.”

The report discusses how the introduction of financial hubs such as the Dubai International Financial Centre and Qatar Financial Centre, alongside well-regulated offshore centers (including Bahrain under the Central Bank of Bahrain), “have helped to open the market and encourage international players to establish a physical presence in the region.

“Close proximity to clients is increasingly being recognized as a fundamental mechanism for (re)insurers to better understand the characteristics of the markets they operate in and ultimately the risks they underwrite.”

Best’s report also examines the fact that “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.”

In the case of “established participants” they “typically benefit from local government support, whether via state ownership or through local legislation that generates compulsory cessions from the direct markets,” the report explains. Newer market entrants, however, “are more exposed to open market competition.”

Over the last five years the technical performance has diverged between the two groups. Myles Gould, financial analyst, noted: “The variance in performance can be attributed to both higher loss and expense ratios for the new entrants. In part, this is driven by competition in the region, and challenges to grow market profiles to dilute expense bases.”

Source: A.M. Best

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