MENA reinsurance sector remains vibrant – QFC Authority publishes the 1st MENA Reinsurance Barometer
- Reinsurance premiums expected to outpace GDP growth
- Reinsurers benefit from improved terms and conditions
- Competition remains intense
Monte Carlo, Monaco – 9 September 2013 – The Qatar Financial Centre (QFC) Authority today published its first annual MENA Reinsurance Barometer. The survey builds on the GCC Reinsurance Barometer, first released in 2011. 38 international and regional reinsurers and brokers operating in the MENA region participated in the study, represented by senior executives. According to the interviewees, confidence in the future of the region’s reinsurance sector remains strong. In fact, 53% of respondents expect that MENA reinsurance premiums will grow faster than the region’s Gross Domestic Product (GDP), despite challenges arising from intense competition and pressure on pricing.
The MENA Reinsurance Barometer surveyed the countries of the Gulf Co-operation Council (GCC), the Levant, North Africa and Turkey. The region has a population of more than 370 million and generates a combined GDP of roughly US$ 3.5 trillion, about 5% of the world’s total. Between 2007 and 2012 the region’s real GDP grew at 4.8% per annum, well above the global average of 3.3%. For 2013 and 2014 the International Monetary Fund (regional outlook April 2013) expects GDP growth in the MENA to slow to 3.4% per annum, largely because of an expected slowdown in hydrocarbon exports.
In 2012, the MENA non-life reinsurance sector was worth an estimated US$ 12 billion in annual premiums, almost a third of the primary non-life insurance market volume of more than US$ 37 billion. Reinsurers operating in the region continue to benefit from the non-life insurance markets’ rapid expansion at an average annual growth rate of 7.6% from 2007 to 2012.
In light of these strong economic fundamentals, it comes at no surprise that survey participants consider economic growth as the main strength of the MENA region. The region’s second most frequently mentioned strength is its relatively low natural catastrophe exposure (except for Turkey, Iran and parts of Northern Africa) which offers diversification benefits to global reinsurers.
In terms of weaknesses, the Barometer confirms that MENA reinsurance markets are characterized by fierce competition and an abundance of reinsurance capacity, resulting in often unsustainable rates. Regulatory deficiencies rank second, with insufficient minimum capital requirements, a lack of minimum retention rules and a lack of regulatory coordination and consistency within the region being mentioned most frequently.
As far as key regional reinsurance market opportunities going forward are concerned, most interviewees point to the low penetration of MENA insurance markets. With total premiums accounting for 1.3% of GDP the insurance penetration of the MENA region is a mere fifth of the global average even though the region’s GDP per capita matches the global average. The pipeline of planned infrastructure and construction projects is the second most frequently mentioned opportunity, representing a volume of assets of more than US$ 1 trillion over the next 10 years.
Unchecked competition is considered to be the most serious challenge facing MENA reinsurance markets. This long-standing concern is further exacerbated by a continued influx of frequently ‘naïve’ capacity in search for instant diversification benefits. It is very closely followed by the need for increased political stability (with a focus on non-GCC countries), relating to both a lack of domestic stability and geopolitical tensions.
Other key findings include:
- 53% of interviewees believe that reinsurance premium growth will continue to outpace regional GDP growth. However, reinsurance exposure is expected to grow at a faster rate than premiums as competitive pressures remain high.
- Terms and conditions have continued to tighten over the past 12 months, a trend which started in 2011 in the wake of the Arab Spring. The share of survey participants citing loose terms and conditions declined from 48% in 2012 to 38%. However, a majority of interviewees consider average reinsurance pricing and profitability levels to be low (89% and 66%, respectively).
- 50% of the executives polled expect reinsurance capacity in the MENA region to grow further as the region remains an attractive high growth, low-catastrophe market with positive effects on overall portfolio diversification.
- 50% (up from 41% in 2012) of respondents believe that the share of regional and Asian reinsurance capacity will continue to increase, at the expense of traditional Western capacity, which, in the treaty area, is even decreasing. This is driven by continued strong capital formation in emerging markets and closer economic ties between the Middle East and Asia.
- 68% of respondents (up from 52%) expect aggregate retention rates to increase over the next 12 months as risk retention becomes more attractive in a record-low investment yield environment.
- On a scale ranging from 5 (very bullish) to -5 (very bearish), the average MENA reinsurance business sentiment measure for summer 2013 came in at 1.2, slightly below the summer 2012 sentiment which stood at 1.3. This marginal decline is primarily due to rising political instability in a number of non-GCC countries. Looking ahead, on average, interviewees expect market sentiment to improve markedly to 2.4 by summer 2014, reflecting a continued trend towards more professional insurance and reinsurance markets. Answers were collected before the most recent political escalation in Egypt.
Shashank Srivastava, Chief Executive Officer and Board Member of the QFC Authority said: “The MENA region continues to be an attractive market place for global and regional reinsurers, due to strong economic conditions and prospects, a largely untapped primary insurance market potential and limited exposure to natural perils. As a result, the region’s reinsurance markets remain highly competitive. It is, therefore, a particularly encouraging result of the most recent Barometer survey that reinsurers operating in the region now pursue a more sophisticated and disciplined approach to business, with beneficial consequences for the region’s primary markets.”
Akshay Randeva, Director Strategic Development of the QFC Authority added: “The MENA Reinsurance Barometer is our fourth regular survey of the region’s reinsurance markets, first covering the Gulf countries and now the wider MENA region. For the first time, the most recent study provides a numerical value to overall reinsurance markets sentiment. This feature adds to the report’s relevance as a market Barometer which is ultimately designed to help improve the transparency of the sector and facilitate more informed decision-making.”
Dr. Schanz, Alms & Company AG, a Zurich-based consultancy conducted the executive interviews and edited the 1st MENA Reinsurance Barometer. The interviews took place from May 2013 to July 2013. A copy of the report can be downloaded at: http://www.qfc.com.qa/Files/Reports/MENA_Reinsurance_Barometer.pdf