MENA region to attract more reinsurance capital

Salman Bin Hassan Al-Thani QFCA

The Middle East and North Africa (MENA) region remains an attractive one for reinsurers and its strengths should enable it to attract further capital from the industry, claims an upbeat report from the Qatar Financial Centre (QFC).

According to the QFC’s just-published 2015 MENA Reinsurance Barometer strong primary insurance market growth and a perceived low exposure to natural perils continue to attract regional and global reinsurance capacity to the region. However, unabated pressure on prices and the increasing share of largely self-retained personal lines business weigh heavily on the reinsurance sector’s growth prospects.

“Reinsurance capacity is expected to further expand in the MENA region,” said Sheikh Salman Al-Thani, the QFC’s chief strategic and business development officer of the Qatar Financial Centre.

“The region’s strengths, namely robust insurance market growth, a vast pipeline of infrastructure and construction projects and a relatively low natural catastrophe exposure, still prevail over the challenges. Excess capacity, a lack of technical expertise and political instability are major challenges.”

The 2015 edition of the Barometer – an annual survey published since 2011 and based on in-depth interviews – shows that between 2009 and 2014 the MENA region’s total non-life and life insurance premium volume expanded from about US$32bn to more than US$51bn.

Growth is driven by the area’s low insurance penetration, with premiums accounting for just 1.4 per cent of gross domestic product (GDP) in 2014, less than a quarter of the global average.

However, as the region’s governments introduce compulsory insurance schemes in motor and healthcare the gap is slowly narrowing. In addition to the expansion of personal lines business, massive spending on infrastructure and construction continues to be the most powerful driver of insurance and reinsurance demand in the region. More than US$1.4 trillion worth of projects are currently underway in the Gulf Cooperation Council (GCC) region alone.

However, only 17% of executives polled still believe that reinsurance premium growth will outpace regional GDP growth over the next 12 months, down from 28% a year ago. The main reason is continued pressure on rates, in combination with the rapid growth of personal lines, such as motor and health insurance, which are characterised by lower cession rates. All interviewees agree that prices are below the five-year average and 45% expect them to decline further.

Nevertheless, 91% of participants expect reinsurance capacity in the MENA region to continue expanding, albeit more moderately than before. The share of those expecting capacity to increase by more than 10% dropped from 18% to just 3%, suggesting a deceleration in growth.

Retention levels in the region remain low compared with other markets – on average domestic insurers in the MENA region cede 30% of their premium income to reinsurers. Only 42% of respondents expect rising retentions over the next 12 months, down from 65% previously.

“As reinsurance capacity is abundant and inexpensive, there is little economic incentive to retain more, despite continued pressure from rating agencies, regulators and reinsurers to have ‘more skin in the game’,” notes the QFC.

Reflecting strong primary market growth and improving regulations, current reinsurance business sentiment remains mildly positive at 0.3, measured on a scale from -5 to +5 (very bearish to very bullish). In addition, long-term fundamentals such as a young and growing population and low levels of insurance penetration support a positive outlook, offsetting negative factors such as continued fierce competition and exacerbating political instability.

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