The Middle East and North Africa (MENA) region remains an attractive growth prospect for reinsurers due to its underlying market growth and low penetration rates, despite persistent challenging conditions, according to a recent report by A.M. Best.
The rating agency noted that a number of recently established reinsurers in the MENA region have had to exit the market due to the ongoing challenges of pricing pressure, overcapacity, and unusually large catastrophe losses.
However, large foreign reinsurers have proved resilient due to their scale and diversification, while longstanding regional reinsurers have also convincingly endured challenging conditions by focusing on bottom line profitability and portfolio optimisation.
Many MENA reinsurers remained sheltered from 2017’s global catastrophe losses, but are looking to diversify into less volatile Asian and African markets due to the high frequency of domestic property losses and ongoing pressure on premium rates, as well as losses from 2018’s Cyclone Mekunu.
Nevertheless, the MENA markets continue to represent robust levels of growth, predominantly due to the region’s mandatory healthcare and the perception that it has a low exposure to natural catastrophe risk.
A.M. Best expects that over the medium term, competitive pressures in the MENA market will persist due to an influx of reinsurance capacity, with any foreseeable movement in market dynamics dependent on the attitude of the international reinsurance market.
Competition may be further compounded by primary insurers that leverage their ratings and capacity to write inward facultative business despite lacking the tools and expertise to underwrite reinsurance business, thereby adding accumulation risk within reinsurers’ portfolios.
The report also found that low retention levels are commonplace for MENA reinsurers due to their reliance on international reinsurers, which have historically been expected to play a supporting role in the market and provide capacity, particularly for big ticket commercial and industrial risks.
In addition to providing technical expertise on sophisticated and high-value risks, overseas reinsurers often offer additional services such as surveying expertise, pricing models, and risk management and mitigation techniques, A.M. Best noted.
While balance sheets remain strong and expertise in local markets is gradually improving, regional reinsurers generally lack sufficient capacity and balance sheet size to retain large-scale risks.
Overall, A.M. Best said that regional reinsurers have proved capable of riding out competitive pressures and carving out market niches to support their operations, but cautioned against diversification outside of domestic markets, which may introduce further volatility.
Aneela Mather-Khan, financial analyst at A.M. Best, commented: “Market conditions for MENA reinsurers are extremely challenging, with pressures on underwriting compounded by economic and political uncertainties. This in turn increases the desire for reinsurers to seek diversification and reduce potential volatility in earnings.
“In A.M. Best’s view, the long-term trends in credit quality are likely to be dependent on reinsurers’ ability to successfully execute growth strategies in a highly competitive market.”