Reinsurers in the Middle East and North Africa (MENA) region have seen a trend of profitability deterioration which has caused loss ratios to far exceed those reported by the global reinsurance market, said A.M. Best.
Technical performance for MENA reinsurers has come under strain by abundance of capital and soft market prices coupled with an uptick in the frequency of medium-to-large regional losses – particularly in property, commercial, and energy lines of business.
Although firms expense ratios remain steady, A.M. Best cited concerns surrounding loss ratios: last year MENA reinsurers saw an increase in frequency of both attritional and large losses with proportional books reflecting declining primary market underwriting trends.
This deterioration in profitability is in part driven by currency depreciation from the non-Gulf Cooperation Council markets – a trend which A.M. Best says is likely to continue in the near term as currencies come under further pressure, “there is also the risk that some GCC economies could potentially lose their peg to the United States dollar if fiscal pressures continue.
“A.M. Best notes with concern that only a couple of reinsurers have seen their technical performance improve during 2016, and even those that are more established are finding the market difficult to navigate.”
As seen in the global reinsurance market, its smaller reinsurers with less developed and diverse profiles that are most adversely affected by these market conditions and increased loss ratios.
In this challenging market environment and consequent weak technical performance, reinsurers’ are more reliant on investment performance to drive up results and return on equity ratios.
However, A.M. Best underscored that investment markets are equally challenged as; “the weak interest rate environment and low-yielding investment markets have resulted in return on equity ratios for regional reinsurers remaining in the low single digits.
“From 2012 to 2016, equity ratios have varied between 4% and 9%, below that of leading reinsurance groups.”
As in the global reinsurance industry, some reinsurers have benefited from the stability of life portfolio’s performance, however, in the MENA region, the life reinsurance market remains small.
MENA reinsurers are being tempted to expand outside their domestic markets, said A.M. Best, however, the rating agency believes that “the desire for more global portfolios may hinder companies further.
“While regional reinsurers have been affected by a higher frequency of large losses in recent years, a more geographically diverse book may reintroduce higher levels of catastrophe risk and volatility into their portfolios.
“Therefore, in A.M. Best’s opinion, risk selection and good client relationships remain crucial to ensure that local reinsurers maintain access to high quality business.”
The rating agency warned that reinsurers seeking to grow profiles in the current environment, are likely to face further underwriting margins pressure, however those focusing on profitability do so at the expense of profile and market share.
It’s clear that recent years have seen the MENA region increase in both opportunities and challenges, and the regional industry, as in the wider global market, will undergo a natural selection process in coming years which is expected to favour highly developed and diverse portfolios.
