A new AM Best report has highlighted how, in general, Middle East North America (MENA) regional reinsurers have demonstrated resilience in a difficult operating environment.
Aside from strong competition, AM Best notes how the region’s reinsurers face performance challenges arising from a lack of both scale and diversification when compared with their international competitors.
Additionally, they often participate as followers on reinsurance programmes, particularly those outside of their home market, which restricts their ability to dictate terms.
The strategies adopted by MENA reinsurers vary considerably, with certain reinsurers benefit from long-standing legal cessions in their domestic markets, while others focus on providing proportional capacity.
Strategic shifts are ongoing, with some looking to increase non- proportional and facultative business, as well as improve regional and international diversification.
AM Best adds that it is not uncommon for reinsurers to report comparatively strong performance in their local market, reaping the benefit of local expertise and long-standing relationships with market participants.
In contrast, attempts to diversify geographically are often accompanied by thinner margins and increased volatility, a function of smaller participations, “follower” positions and varied risk exposures, which differ from those in their home markets.
AM Best also sees an increasing volume of natural catastrophe losses has having affected performance in recent years.
The frequency of flooding in the region is increasing – with notable flood events having occurred recently in the United Arab Emirates (UAE), Bahrain and Kuwait – and the risk is still not appropriately modelled and priced into policies despite recent improvements in regional catastrophe risk modelling.
Oman has also seen several large cyclone losses, and the region is exposed to earthquake risk.
Despite general pressure on underwriting margins, AM Best says overall returns have remained robust for MENA reinsurers, with returns on equity (ROE) largely sitting around the mid-single digits.
Investment performance continues to be a core component of operating results. However, with the exception of Turkey and to a lesser extent Tunisia, interest rates across the region remain low, and volatility in the fair value of assets is prevalent.
In the near-term, the economic fallout of the COVID-19 pandemic and low oil price environment are likely to add to the strain on investment returns and total operating earnings for regional reinsurers.
