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MENA insurance sector still ‘immature’

Last updated: Tuesday, October 16, 2012 11:53 AM

JEDDAH — The Middle East North Africa (MENA) regional insurance and takaful market is expected to rise just under 5 percent this year, despite tough economic conditions across the region, ratings agency A.M. Best in a report.

The insurance, reinsurance, takaful and cooperative markets within the Middle East and North Africa (MENA) continue to offer opportunity for growth, although the global slowdown of financial markets and political instability in the region threaten to dampen prospects for some companies, ratings agency A.M. Best said in its October “Market Review”.

“While the MENA insurance markets have experienced double-digit premium growth in recent years, the pace of growth has slowed in 2011 and 2012, with most markets expected to achieve increases in total gross premiums written (GPW) of less than 5 percent this year. Declines in GPW have been more pronounced in countries affected by the Arab Spring where growth has either declined or stagnated in 2011, with difficult trading conditions in 2012.”

The regional conventional and Islamic insurance remains “immature,” said A.M. Best.

Non-life insurance accounts for 80 percent of the premiums while life sector remains largely untapped in many countries.

“The MENA insurance markets tend to be immature, with very low penetration rates compared to their international peers,” it noted.

Slowly but surely, demand is growing as many compulsory lines of business such as medical healthcare and automotive insurance are introduced in various countries.

“Obligatory medical schemes are considered to present the greatest opportunities in the region, although they remain fiercely competitive and need to be controlled to produce profitable growth.”

Further, the wider insurance market faces regulatory challenges are registering promising growth.

“Overly optimistic projections for increases in insurance penetration resulted in high expectations on profitability and company valuations,” A.M. Best said. Consequently, new shareholders entered the market with high expectations of returns on their capital and little appreciation for the riskiness of the insurance business. This coupled with the significant emphasis that many companies traditionally have placed on investment returns, has resulted in many insurers becoming akin to high-risk investment funds.”

Regulators will need to play a strong role and raise their own standards in order to compete with dynamic changes taking place in the regional conventional and takaful industry.

Greater controls over new entrants and greater awareness could ensure that the faltering market gets back on its feet once again.

Clearly, the fundamentals in the market are all there. Despite the volatility in parts of the region, the demographics and economic dynamics, especially in the three biggest markets, Saudi Arabia, UAE and Egypt suggest those markets are ripe for conventional and Islamic insurance to prosper.

The region’s economy has been hit by the global crisis and the regional turmoil, although pockets of growth in the Gulf remain largely insulated.

In an earlier report, A.M. Best had noted the Arab Spring protests will negatively impact the insurance industries of the affected countries, with premiums as a whole projected to be only 0.7 percent lower in 2015 than they would have been otherwise. “Eleven of the 16 MENA countries are expected to experience lower premium growth than they otherwise would have before the protests, while five other MENA countries are projected to experience modest increases,” the report noted.

The regional outlook for takaful also remains uncertain. Standard & Poor’s said in a recent report it remains concerned by “widespread use of high-risk investment strategies by takaful providers, and by the sector’s lack of global standards in areas such as accounting standards and Shariah compliance.”

The ratings agency said it is unclear how many of the companies involved will sustain their profitability over the longer term, particularly in the GCC region, where regulations remain weak.

The insurance companies are also hamstrung by lower interest rates globally. Moody’s rating agency expects local insurers’ to remain exposed to real estate and equities for the foreseeable future.

“Over the next 12-18 months, investment risk will therefore continue to constrain insurance ratings in the GCC region,” Moody’s noted in a report earlier in the year.

“However, insurance regulators in the region are increasingly embedding prudential insurance regulatory supervision philosophies into their monitoring of local insurance companies. — SG

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