JEDDAH — 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, A. M. Best Co. said in its special report on Middle East & North Africa Non-Life and Life Insurance market this October.
The report noted that the two main regional markets remain the UAE and Saudi Arabia, which is indicative of their economies and the potential of their markets. Both countries benefit materially from oil revenues, which have stimulated growth, in addition to the introduction of compulsory medical schemes. Both countries are expected to maintain their status as the main markets of the Middle East in the short-to-medium term.
Premium volumes continued to rise in 2011 in the UAE, Saudi Arabia, Morocco, Egypt, Lebanon, Algeria, Qatar, Tunisia, Kuwait, Oman, Jordan and Bahrain are expected to further increase in 2012, albeit at a slower pace.
The report further said that 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 region has experienced strong growth over this period, with premium volumes more than doubling from 2006. This is indicative of the growing economies of these markets, where insurance penetration has been extremely low. Take-up of insurance becomes more pronounced as opportunities develop and recognition of the importance of insurance improves.
Furthermore, developments in regulation and compulsory insurance have assisted growth in some markets.
Non-life insurance products, which include medical insurance, dominate the market and account for approximately 80 percent of premiums generated. The life sector is more underdeveloped than the non-life sector, with both segments considered to have opportunities for growth.
The MENA insurance markets tend to be immature, with very low penetration rates compared to their international peers. There is greater demand for insurance as the awareness of the benefits of insurance grows and regulators encourage the take-up of insurance with the introduction of compulsory lines of business, including motor third-party liability and medical health care.
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.
Global demand for the region’s oil and gas resources is fuelling strong economic development and gross domestic product (GDP) growth, particularly for the oil rich Gulf Cooperation Council (GCC) economies. Oil prices are above economic budgets for these countries at present, enabling governments to continue to finance infrastructure and development projects and subsequently increase insurance activity. While economic growth in the MENA territory is strong compared to other more developed regions, GDP prospects have been impacted by the financial crisis of 2008 and the Arab Spring of 2011.
Political instability in the region has caused a drop in investors’ confidence and remains very much apparent, the report said.
A.M. Best places companies into five categories based on the risk presented by their country of domicile, ranging from the lowest risk, “CRT-1” (Country Risk Tier 1), to “CRT- 5” (Country Risk Tier 5) for countries considered to face the highest economic and political risks. Since the Arab Spring, A.M. Best has lowered the CRT for one country, Egypt, from CRT-4 to CRT-5, in light of the social unrest and worsening economic fundamentals of the country.
Moreover, the reinsurance market in the MENA region has grown substantially over the past few years, benefiting from the expansion of local markets. This has not just resulted in a greater number of regional reinsurers domiciled within MENA territories, but increased the interest from international players seeking greater diversification in lower catastrophe exposure areas.
The added capacity in the MENA reinsurance markets in recent years continues to drive rates down further, resulting in lower levels of profitability. The majority of business emanating from MENA countries is proportional, with most risks (and to some extent including medical) placed on a bouquet basis. However, there is a gradual shift towards non-proportional placements where reinsurers can have more control over pricing and risk selection.
There have been some concerns regarding commissions, which now have a greater tendency to be linked to the underwriting performance of the respective portfolio. Such changes and the bottoming of reinsurance rates should improve the attractiveness of reinsurance in the region.
The wide variations in results between local reinsurers have been indicative of companies’ market strategies.
Reinsurers that have been very selective in terms of territories and risks, i.e. restricting themselves to familiar markets of the Middle East and North Africa, have tended to perform remarkably well with combined ratios below 100 percent in recent years, the report noted. — SG