(MENAFN- Gulf Times) The Middle East and North Africa (Mena), especially the Gulf region, has become a target for the international and domestic reinsurers, according to A M Best, a global rating agency for the insurers.
Finding that insurance markets in the Mena region have grown "significantly" over the past decade with premiums surpassing $50bn in 2014, it said "the low level of insurance penetration seen in many Mena countries, combined with the robust, albeit deteriorating, profitability achieved by the leading primary insurers, has made the region a target for both international and domestic reinsurers."
"Many Mena markets, such as those of the Gulf Cooperation Council (GCC) 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," the agency said in a latest report.
However, the issue of overcapacity in the region has been further amplified by reinsurers operating in the Indian subcontinent, the Asia-Pacific territories and Africa, expanding into the Mena region, it said.
A large contributor to premium growth in the primary market has stemmed from the expansion of "big ticket" commercial and industrial risks, for which the direct writers are typically only capable of supporting a minimal retention, the report found.
"This reflects the fact that primary insurers usually lack sufficient underwriting capacity and balance sheet size to retain these large-scale risks," A M Best said.
Highlighting that infrastructure projects, as well as consumer and business confidence, has rebounded to a stronger level; it said the resulting expansion in infrastructure and commercial risks, which typically require extensive reinsurance support, has fuelled increased demand for the reinsurance sector.
While the 2014 decline in oil prices and the future value of this commodity cannot be disregarded as a factor driving economic growth in the Mena region, the impact on the (re)insurance sector is expected to be "minimal" over the medium term, it said.
Even in the case of moderate economic contraction arising from persisting low oil prices, A M Best believes there is still opportunity for increased insurance demand in the region, given the low levels of insurance penetration and continued rollout of compulsory insurance.
Expressing optimism that lifting of trade restrictions on Iran may present a significant opportunity for the reinsurance market, it said Iranian direct insurance market is one of the largest by premium volume in the region.
Whilst both new entrants and established participants have been faced with the prevailing landscape of overcapacity and soft premium rates, their profiles and performance vary considerably.
The profiles of established participants typically benefit from local government support, whether via state ownership or through local legislation that generates compulsory cessions from the direct markets.
In contrast, new entrants, who usually do not benefit from government support, have struggled to generate underwriting profits, with a five-year weighted average combined ratio of 114% reported for this group from 2010 to 2014 against 98% for the established participants.
"The considerable variance in performance can be attributed to both higher loss and expense ratios for the new entrants," it said, adding in part, this is a factor of the level of competition in the region, which has seen many of the new entrants writing business at lower rates in order to penetrate the market and grow their profiles.
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