The Middle East & North African (MENA) region offer attractive growth opportunities, however the credit quality of re/insurers operating in the territory is likely to be tested over the next few years as a result of the increasing geopolitical uncertainty, A.M. Best said in a Special Report on MENA.
Analysts pointed to the ongoing disagreement between Qatar and a number of other Middle East countries (which severed their diplomatic ties in June 2017); the war in the Republic of Yemen; and growing instability throughout the region as factors propelling the region into uncertain times.
Nevertheless, A.M. Best said most of the rated companies have maintained their ratings during 2017 although there have been more downgrades or negative rating actions when compared to the previous year.
Premium growth in the Gulf Cooperation Council countries (GCC) – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE) – remains robust compared to most mature markets, with the insurance industry benefitting significantly.
However, the region has suffered from a decline in oil-based economic growth, causing governments to seek out diversification strategies.
This has had a knock-on effect on some re/insurers in the region, who also face having to adapt to new taxation rules as GCC members begin to introduce a value added tax (VAT), with insurance products other than life insurance likely to be subject to a standard rate.
A.M. Best said many re/insurers in the region appear unprepared for its implementation and this could result in short-term cash-flow issues for insurers.
In addition, some countries such as Egypt and Turkey, are experiencing greater economic volatility, suffering from currency depreciation and high inflation.
Thus adaptation is highlighted as the key to successfully navigating the challenging MENA operating environment; firms with risk management capabilities best suited to the region are those that have been most likely to see positive rating actions.
The rating agency also warned that in Bahrain and Oman, both of which require a higher oil price to sustain economic funding, If hydrocarbon prices were to remain persistently low, coupled with reduced support by neighbouring Gulf countries, there’s a likelihood their currencies may be unpegged from the U.S. Dollar, which would have repercussions for the insurance sector.
However, A.M. Best remains optimistic on the region, pointing to opportunities for growth from the fact that a number of MENA countries including Kuwait, Oman, Saudi Arabia, Egypt, and Algeria had total insurance penetration rates below 2% in 2016, compared to the world average of 6.3%.
Health insurance is also already mandatory in Saudi Arabia, Abu Dhabi, and Dubai, and is now being rolled out in Qatar and Oman.
Despite the challenges to operating in the MENA region, the low penetration rates compared to other emerging economies in addition to the continued introduction of compulsory covers such as medical healthcare make it still rife with opportunities for re/insurers willing to adapt and react quickly to geopolitical change.
