MULTAQA 2014: What are the factors that will drive insurance penetration?

Middle East

As delegates prepare for next year’s Multaqa Qatar meeting, it is clear the local insurance market is maturing. But is the pace fast enough?

While there are plenty of factors that make the Middle East insurance market a compelling one, both from a local and international perspective, one in particular stands out. While economic growth rates have stagnated in the west, and slowed considerably in other emerging markets, in the MENA region GDP growth rates continue to outstrip most other regions of the world.

As the good and great from the market gather in Doha in March for the event hosted by the Qatar Financial Centre and organised by GR, the region’s growth rates, multi-billion dollar megaprojects and potential will once again dominate the agenda. Despite the highly competitive re/insurance market in the Gulf Cooperation Council (GCC), it is this potential that continues to capture the industry’s attention, thinks Guy Carpenter MENA managing director Christopher Pleasant.

“There’s always a question that the grass is greener,” he says. “All the companies in the more developed markets in Europe and the US are looking around the world to see where they haven’t got an operation. We do see dramatic GDP growth in most of the Middle East territories, so any insurance company of any size will feel they have to be in that market, even if they have to subsidise it in the short term.”

“This is part of the problem we have in the region,” he continues. “We’re attracting the major European reinsurance companies, so they grow their business by bringing all their capacity and expertise and want to have a major market share, so they are as guilty as anyone in driving the pricing down. The return is still sufficient if you’re a reinsurer and you’re selective about what you write.”

The market is not just attracting the attention of international reinsurers based in markets such as the US and Europe. An increasing number of Asian reinsurers have set up branch offices or takaful offerings in the region, while the GCC itself supports its own regional reinsurance companies, with Qatari Q-Re the most recent start-up.

A major attraction of the GCC market in particular is that it is considered to be non-catastrophe exposed. This also helps maintain soft rates for property reinsurance. “Nobody is rating properly for catastrophe because the experience of the region has been that it’s not really exposed,” says Pleasant. “Some of the reinsurers are trying to squeeze the terms because they don’t see there is sufficient rating for any cat exposure in any of the original pricing.”

While there have been some weather-related events, ground shaking felt from earthquakes in Iran and even a couple of cyclones in Oman, these are infrequent and so far there have been no major claims, bar some minor flood and hail losses in Saudi Arabia. As a result, Gulf-based accounts offer a favourable diversification benefits for re/insurers that have cat-exposed business in other parts of the world.

From an industrial and commercial property perspective the GCC insurance market has had some notable claims in recent years. A series of fire losses have had an attritional impact on reinsurance treaties, particularly given the way risk is shared around the market. “The frequency of large risk losses are more of an issue at the moment,” says Pleasant. “One large fire loss can wipe out the year’s return on their treaties – it’s a fairly narrow path that the insurance companies are trying to tread to keep the reinsurers in a good position.”

While this may not be enough to drive up reinsurance pricing in the market, terms and conditions are tightening on loss-hit accounts, observes Pleasant. “A couple of years of losses will undoubtedly translate into a tightening of insurance terms – that’s the time when it gets quite tough for an insurance company.”

The local insurance markets have their own set of challenges, some of which will feature in discussions at MultaQa. As maturing insurance markets there has been an evolution in the approach to risk taking in recent years, particularly with the larger insurers. Credit ratings have become more important and, as part of that, carriers are retaining more of the underlying risk.

The days of insurers behaving as risk traders in return for a commission are coming to an end, Pleasant thinks, although this remains a feature among some of the small carriers. The financial crisis has helped to drive this, as a business model based purely on investment returns and commission is no longer sustainable.

“I see a bifurcation in the market between the larger companies who have achieved significant growth over the last five years or more and have the volume and manpower to do more analysis on their accounts,” notes Pleasant. “They see in some areas they were paying away substantial profitable revenues to reinsurers and have decided to take larger retentions (particularly in excess of loss and more volatile classes where this is required by reinsurers).”

“Some companies are seeking to improve their ratings and getting more technical advice from brokers on what they should be retaining and are taking a more detailed look at the structuring of their reinsurance,” he concludes.

Keeping MENA competitive

By Yassir Al Baharna, chief executive of Arig

In order to compete effectively with other emerging insurance markets, MENA must embrace the following:

·         changes in the regulatory and supervisory landscape, fuelled by recent change and current unrest;

·         the need to re-visit corporate strategies and business models, given the ongoing changes in the industry landscape;

·         the need to achieve risk adequate terms for insurance products to alleviate the considerable volatility in the financial performance;

·         the need to have technical expertise to be in tune with an increasing number of insurance ventures; and

·         the need to invest in technology to enable growth and improve operations and risk management.

The insurance industry in the GCC has achieved continuous growth on the back of impressive economic growth, population expansion and significant improvement in the regulatory environment. The introduction of compulsory covers and the growing acceptance of insurance among the large, predominantly young, populations of the Middle East countries should help drive insurance penetration.

Yet at present, penetration remains surprisingly low and there are barriers to consolidation. Many countries support too large a number of small insurers, but M&A activity has been thin on the ground. Reasons for this include the fact that many are owned by conglomerates and behave more like captive reinsurers for these family-owned groups. Another is unrealistic valuations.

Insurance penetration in the GCC was at 1.1% in 2012, just under one-sixth of the global average, according to one industry report. Arig chief executive Yassir Al Baharna puts this down to the underdevelopment of the life insurance sector and the limited range of compulsory insurance classes. “The investment in the life insurance segment is limited, and governments have so far not been interested to shift some of the financial burden related to old age benefits to the private sector,” he notes.

While compulsory classes would support premium development, insurers have struggled to make a return from the mandatory covers that have been introduced, including healthcare and motor. “When governments decide to make protection mandatory, professional standards can take a backseat,” says Al Baharna. “While medical has been adding a lot of premium volume to the regional markets, few companies have managed to turn it into a profitable business. The same could well be said about the takaful sector.”