Pressure on MENA reinsurance market persists as players produce mixed earnings: Report

Reinsurance markets in the Middle East and North Africa region (MENA) are generally perceived as a source of expansion, with continued market liberalisation and the gradual removal of sanctions from Iran expected to yield further opportunities for reinsurers. Furthermore, the robust, albeit deteriorating, profitability achieved by leading primary insurers over the last five years has enhanced the region’s attractiveness to both foreign and domestic reinsurers.

A new Best’s Special Report, titled, “Pressure on MENA Reinsurance Market Persists as Regional Players Produce Mixed Earnings,” notes that the majority of markets are open with few restrictions on reinsurance operations, despite initiatives in some countries aimed at nurturing growth and the retention of business within the local market.

Mahesh Mistry, director, analytics, and author of the report, said: “Reinsurers domiciled in the region are generally well-capitalised, with existing participants strengthening their capital positions through retained earnings and more recent market entrants typically holding surplus capital to support their expanding franchises. Capital requirements are largely driven by underwriting risk, with most reinsurers adopting conservative and diverse investment profiles and high net retentions that minimise exposure to counterparty credit risk.”

The report notes that operating performance remains profitable for most reinsurers in the region; however, for many this reflects robust investment income that has offset increasingly pressured underwriting earnings. The persistence of thin technical margins coupled with an increase in large loss experience from property, engineering and energy lines has resulted in diminished underwriting results for many regional reinsurers in 2015. Given that technical margins in the region have been declining in recent years, regional reinsurers are looking further afield to search for higher margin businesses that complement their existing portfolios.

“While this can be viewed as a positive step, there is undoubtedly execution risk associated with expanding into unfamiliar markets, given the higher anticipated catastrophe risks that may be assumed by writing new business, and which could result in unexpected volatility in company earnings,” added Mistry.

Overall, A.M. Best believes that while MENA-domiciled reinsurers continue to target growth in presence and penetration in the region, the majority of companies remain small when compared with their international counterparts. In addition, with the persistence of economic and insurance market headwinds, reinsurers’ earnings are expected to be put under increased pressure over the medium term. Technical performance has remained pressured for most regional reinsurers over the last three years, and therefore, remains a key rating consideration for A.M. Best. However, improving enterprise risk management does go some way toward reducing earnings volatility.