Regional rumblings, but opportunities abroad
Any conversation about the Middle East and North Africa (MENA) inevitably starts with the Arab Spring. However, from a re/ insurance perspective, and for those not directly involved in markets affected by war, civil insurrection and instability, events have been a brake on development, rather than being sufficient to derail regional progress. As Mahesh Mistry, associate director at AM Best outlined, there has been a “minimal, gradual decline in re/insurance opportunities in the region in 2011”, but much of this can be accounted for by global economic conditions rather than regional unrest.
Mistry said that in countries such as Egypt, Libya and Syria “reinsurers have been obliged to pull back”, while in others “sanctions and the stigma associated with government-related businesses might deter some going forward”. Nevertheless, none of these countries is a particularly significant market for the industry. This may change in the future, he said, but for now the situation has helped to limit the impact of the Arab Spring.
"IF YOU LOOK AT OIL PRICES AND GOVERNMENT ENERGY REVENUES IN THE REGION, THE GCC IS WELL PLACED TO STIMULATE FURTHER GROWTH WITH OBVIOUS SUBSEQUENT BENEFITS TO THOSE REINSURERS WHO PICK UP THE LARGE COMMERCIAL RISKS IN THOSE COUNTRIES."
Maamoun Rajeh, chief underwriting officer at Arch Re—which is a 50 percent joint venture partner in regional reinsurer Gulf Re— andmember of the board of directors at Gulf Re, argued that while the Arab Spring has not had a significant impact on its core business with the countries of the Gulf Cooperation Council (GCC—a political and economic alliance comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates [UAE]) “nothing happens in the region in isolation”. Rajeh said that Gulf Re had seen a “slowdown in construction and infrastructure projects, caused initially by the financial slowdown of 2009/2010, and probably further impacted by the Arab Spring”, but events have left its core GCC region largely unscathed.
Simon Ball, international treaty class underwriter at Chaucer, spoke in a similar vein, arguing that reinsurance losses associated with the Arab Spring were not significant, considering the level of global cat losses suffered in 2011. However, Ball indicated that “modest losses did impact certain regional reinsurers and there is certainly potential for larger losses in the future” associated with ongoing unrest.
Despite the near-miss of more significant turbulence, Ball said, the Arab Spring had raised concerns within the industry. “Regions that had previously been deemed pretty benign in terms of political risk (and ensuing physical damage) have become materially more risky— overnight in some cases,” he went on. In order to respond to the changed environment, on-the-ground expertise will be all the more pressing for international reinsurers. “Reinsurers will need to look to primary insurers in the region to help them understand and price the risk appropriately,” said Ball.
Nevertheless, there are opportunities associated with the destruction brought on by the unrest and civil insurrection in the region. As Rajeh outlined, widespread damage to infrastructure associated with the conflicts in Iraq, Libya and even Egypt “present opportunities for strong re/insurance and economic growth, particularly on the construction and reconstruction side”.
SRCC: under close scrutiny
Perhaps one of the most interesting developments to have emerged from the Arab Spring from a re/insurance perspective is the close attention now being paid to strikes, riots and civil commotion (SRCC) coverage. “Events concentrated the minds of property treaty underwriters who attempted to clearly exclude political risk from property physical damage cover,” said Ball, “with some ambiguity as to whether riot and civil commotion sections of existing exclusions included damage associated with the Arab Spring.”
Mistry concurred, indicating that events had sparked “some debate” regarding whether SRCC was a component of existing contracts. For international reinsurers the stance has generally been that such risks are not covered by existing agreements, while regional players “are more likely to feel obliged to offer such assistance to the markets”, he said. Following tumultuous events in the region, there has since been a “tightening-up of conditions”, with SRCC increasingly being offeredas an “add-on to existing policies, with an additional charge levied for such coverage from the direct writers”, said Mistry.
Despite rising violence in parts of the region, there has not been a definitive uptick in purchases of additional coverage relating to terrorism and SRCC. Interest had remained muted, said Rajeh, while according to Ball, Chaucer had seen some clients turning to the London market in search of stand-alone coverage for terrorism and political violence risks previously excluded in standard property treaties. It seems that the geographic focus of violent events in countries with relatively low levels of re/insurance penetration and the relative immaturity of these markets have served to limit take-up of SRCC coverage in the region. Should the Arab Spring develop, however, this may change.
Opportunities abound
Despite troubled conditions associated with the Arab Spring, low levels of insurance penetration and prospects for strong economic development present significant opportunities in the region. As Mistry outlined, “these markets are growing and we would expect them to continue to do so going forward”. There had been a decline in economic growth in 2011, but nevertheless the region stood up well compared with wider global economic conditions, he said. With real GDP growth in the MENA region predicted to be 4.5 percent in 2012, according to figures from HSBC, prospects for greater re/insurance penetration are significant.
As Rajeh outlined: “We come at it from the premise that insurance is a good thing for economies—it facilitates trade and in developed markets it is pretty prevalent. This will increasingly be the case in the MENA region.” He said that moves are already afoot to deepen insurance penetration in the region, such as the introduction of mandatory health insurance in certain countries of the GCC, with such moves likely to “provide both insurance growth and premium”. He warned that technical results on such lines remain “unsatisfactory at present”, but that generally “premium growth in the region is explosive. Like any emerging region, insurance take-up will grow in step with GDP growth and will, in fact, act as a further facilitator of that growth”.
Addressing opportunities in the re/insurance space, Rajeh said that motor, health insurance, construction and energy had experienced the most dramatic growth—“in that order”, with Gulf Re’s focus being very much on the commercial lines. “We are P&C focused at Gulf Re, although our present position does not mean that we cannot at some point get involved in health insurance or other lines and bring in the necessary expertise,” he said.
Mistry added that personal lines such as motor and medical had experienced significant growth, but that the competitive pricing environment had generally dissuaded international reinsurers from involvement on such lines. “Some will have quota shares on the medical lines, but there is greater focus on the commercial business. And if youlook at where commercial lines are likely to be the most prevalent—in the GCC countries—that is where there is a concentration of reinsurer interest.”
This concentration of interest in the GCC has proved opportune. Not only does the region have the lion’s share of energy revenues and associated energy and construction projects, it has also been far better insulated from the fall-out of the Arab Spring than countries to its north. Gulf Re boasts just such a geographic profile—“the GCC countries are where our company is based, where our expertise is, and where our relationships are strongest”—with the region likely to remain its core. Rajeh said that where the company thinks it can deliver value, expertise and capacity in the wider MENA region it will seek to engage with partners, but added that for now the GCC satisfied most of its regional ambitions. Other reinsurers have taken a similar stance.
Mistry indicated that the economic strength of the GCC countries would inevitably make them the most attractive places in the MENA region for global and regional reinsurers. “If you look at oil prices and government energy revenues in the region, the GCC is well placed to stimulate further growth with obvious subsequent benefits to those reinsurers who pick up the large commercial risks in those countries.” Ongoing and significant regional development is likely to represent fertile ground for re/insurance growth.
Mistry added that those regions affected by violent events in the Arab Spring will also present significant opportunities for reconstruction projects. “Much will obviously depend upon the political situation— who comes to power and what their plans are—but North Africa and Syria have the potential to bounce back strongly.”
Regional nuances
Despite positive signals for future re/insurance growth, awareness of the potential of the product remains low across the region. As Mistry explained: “Few people feel the need for insurance. Governments and regulators in the region really need to highlight its benefits.”Further stifling development has been government intervention on pricing, with lines such as motor dictated by tariffs. Mistry said that the markets’ approach to rates would need to evolve so that the pricing environment does not simply benefit the policy-holder, but “guarantees adequate competition that is fair to all parties involved”.
Touching upon the issue of government-backed insurers and reinsurers in the region, Mistry and Rajeh both said that they had not proved impediments to growth. Mistry said that in a number of countries government-backed entities are likely to be the top player and have “preferential access to key projects and risks, but that with the number of the large commercial risks that need good technical expertise on the rise, there will continue to be opportunities for global reinsurers in the region”. Rajeh added that a host of players are operating in the region, with competition “fierce”, particularly in the GCC. In UAE alone there are 69 re/insurers, he said, with the numbers reflecting an “open and competitive market”.
Ball indicated that concerns remain regarding the need to ensure greater market transparency and to introduce “regulation requiring catastrophe exposure assessment and management by insurers (including political violence and terrorism accumulation risk assessment) so that appropriate reinsurance coverage is purchased by insurers”. Until such measures are introduced, “gross exposures and probable maximum losses could threaten solvency margins”, with evident implications for the stability of regional markets. It seems that further market development is still needed. Global expertise will inevitably have a role to play in this evolution.
Addressing the nuances of the region, Rajeh said “we engage in this region much as we do in any other: respectfully and aware of local differences”. He added that Gulf Re is helped by being based in the region, a situation that has enabled the reinsurer to “navigate the marketplace and develop local expertise”. Rajeh was keen to highlight this local presence and expertise as a key strength of Gulf Re. “When you have claims managers dealing with clients and surveying claims locally, that is a differentiator from reinsurers with only a back office in the region; over time this difference is heightened and becomes a competitive advantage.”
Although there are obvious benefits to having local offices and expertise in the region, global markets such as Lloyd’s also have considerable experience of the region. As Ball outlined, “The London market has a great and long-standing network of contacts and partners in the MENA region who understand and keep up to date with nuances and developments there—political, legal, economic or otherwise. This enables London market underwriters to be at the forefront of product development”.
One such area is takaful and retakaful, which although not significant within the portfolios of global players, present opportunities in the MENA region. As Ball outlined, such products should “greatly enhance access to hitherto untapped markets in the region”. Rajeh concurred, stating that while Gulf Re is not active in the space, Islamic products “speak to product development and are positive for growth and penetration in the region”.
An ambitious region
The future appears bright for the MENA region as re/insurance penetration and regional development deepens. Addressing successes so far, Rajeh said that since Gulf Re entered the region in 2008, eight other reinsurers had established themselves in the region. Some of these entrants were driven by the search for diversification—“a factor that should not be ignored”—but many of the new entrants were simply satisfying the need for additional re/insurance capacity. “The reinsurance business is so global that players will fulfil the need for capacity wherever it may be—and the MENA region is no different,” he said.
“Our view is that the region is well served by re/insurers. In our target markets there is around $1.8 billion of capacity available, with approximately $1.4 billion of that rated ‘A’ or better by AM Best,” he added, with the region appearing well served going forward. Asked whether conditions would attract further players to the region, Rajeh said that this decision would inevitably be “driven by the economics of the business”, but that the acceleration in construction projects and business development in the region would prove an undoubted spur.
Finally, touching upon those dabbling in the MENA region, Rajeh said that a number of companies had established offices in the region not long ago, only to shut them down in recent months. “This is a region where you need to commit and take a view for the long term”, much as Gulf Re has done with its stand-alone offering, capital and regional staff, he said. It seems that recent fears brought on by the Arab Spring have served to discourage opportunistic plays, elevating the position of those ready to commit to the region’s ongoing development.
