The fallout of low oil prices, the Russian crisis of 2014 to 2017, the UK’s exit from the EU, and the Trump administration’s swing towards protectionism have all contributed to mounting economic & geopolitical pressures, impacting re/insurers by driving an anti-globalisation shift.
A.M. Best highlighted the trend towards protectionist measures on re/insurance in markets of the Commonwealth of Independent States, the Middle East and North Africa, and Sub-Saharan Africa (EMEA) in its Special Report.
To develop local insurance markets, recent years have seen some EMEA insurance regulators impose protectionist measures, including: compulsory domestic cessions to a state reinsurer, restrictions on foreign ownership, limits on foreign investment, the introduction of minimum net premium retention levels and higher capital requirements for reinsurance cessions overseas.
Valeria Ermakova, A.M. Best senior financial analyst, noted these regulations can act as a stop-gap to local re/insurance and economic development; “given that participants in the emerging markets generally have lower levels of financial strength by international standards.
“This issue is amplified by premium funds being invested in devaluing local assets, considering the challenging economic conditions and volatile financial markets that some of the countries experience.
“Furthermore, isolation of insurance markets may lead to a lack of consumer choice and inadequate service levels as national players are not able to benefit from the expertise of their peers in the global market, where technology and innovation are drivers of the industry,” she said.
Protectionist measures attempts to safeguard local policyholders and insurers – however, these can often curb effective risk transfer; a factor widely recognised as being vital to economic and social development and prosperity.
Russia is a key economy now insuring much of its risk within its markets following the imposition of sanctions on international trade; neighbouring Kazakhstan remains a relatively protected insurance market.
However, A.M. Best said there have been some efforts to introduce regional integration: “in particular, the Eurasian Economic Union (EaEU) which took effect on 1 January 2015, currently consists of Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia.
“One of the objectives of the EaEU is to create a uniform insurance market among the nations. Long-term challenges include the introduction of a consistent regulatory and solvency environment across the union, given the different stages of development of its members’ markets, and the proposed introduction of a regime similar to Solvency II in Kazakhstan. At present, the market remains relatively fragmented.”
Across the Middle East protectionism has picked up speed as governments respond to a period of fiscal pressure from reduced oil prices by introducing protectionist measures in the re/insurance arena as they seek to minimise oil-dependency.
Saudi Arabia has embarked on a strategy, Vision 2030, of diversifying its economy away from its reliance on oil revenue.
“The Saudi government has been successful in enacting a complete Saudisation of its banking industry, and now seeks to replicate its success in the insurance sector,” noted A.M. Best, “Similar efforts have been accelerated in Qatar and the United Arab Emirates (UAE). Given the lack of insurance expertise amongst the local workforce, companies can face pressures to employ staff who lack the requisite skills and knowledge to manage insurance operations.”
Iran’s sanctions have stifled local innovation and curtailed an improved sophistication in insurance risk management and regulation, and despite certain sanctions recently being lifted and a number of European reinsurers announcing plans to re-enter the Iranian market, to date, none have made significant strides to provide capacity, said A.M. Best.
This has led to the country’s largest reinsurer, Bimeh Markazi, also acting as insurance regulator, A.M. Best said this causes “a significant conflict of interest that is not likely to exist in other insurance markets that have kept pace with global developments.”
The rating agency expects in coming years, oil-producing countries will seek to find a balance in opening up their economies whilst ensuring adequate levels of insurance domestication.
Broadly speaking, in Sub-Saharan Africa there are fewer protectionist measures from governments compared to other countries as they are keen to draw in further foreign direct investments.
In spite of this, A.M. Best highlighted a movement in governments across the continent towards strengthening legislative frameworks to support the retention of profits in their respective countries.
Salman Siddiqui, A.M. Best associate director, said; “Excessive protectionism, such as the discouragement of cross-border reinsurance placements, may have major negative implications as it creates an unnecessary exposure of national assets and government funds to claims from catastrophes or man-made disasters, as well as to an accumulation of losses.
“On the other hand, the availability of reinsurance capital from a diversified international panel brings down risk-transfer costs and helps to disperse risk.”
For most emerging markets in EMEA, a key consideration is the level of restrictions on foreign participation within these economies, in addition to reducing the outflow of income generated by the country, said A.M. Best, concluding that whilst such measures can be beneficial when applied prudently, an open and competitive reinsurance market is vital for risk-transfer and market development.
