Increased turbulence across a Middle East and North Africa market characterised by challenging conditions, overcapacity, and a rise in large loss activity is creating challenges for some and opportunities for others, according to a recent report by AM Best.
The ratings agency had warned earlier this year that re/insurers operating in this region could face significant volatility in the short to medium term due to an economic slowdown, regulatory changes, social unrest, and a lack of diversification.
Now, AM Best notes that MENA reinsurers are looking to alter their portfolios in favour of new or less volatile segments, and are seeking to diversify their revenue streams.
“The competitive landscape has shifted over the past year, driven largely by the difficulties encountered by two of the region’s leading reinsurers,” said Salman Siddiqui, director, analytics at AM Best.
“Between them, they supplied capacity of USD 600 million (in total shareholders’ capital) to the market, and also had reinsurance operations across the world.
“As many cedents sought to replace these reinsurers on their reinsurance panels, opportunities opened up for existing competitors looking to increase their line size and diversify their cedent base, as well as for newer competitors to enter the market.”
The report also notes that well-established regional reinsurers have shown resilience to the challenging operating environment.
Although their performance has lagged that of their global peers, they continue to ride competitive pressures and carve out market niches to support their operations.
Furthermore, while international reinsurers have historically found the MENA market attractive due to its diversification benefits – as well as the perception that the region has limited risk in terms of natural catastrophes – this perception has been challenged in recent years.
Additionally, whilst modelling for earthquake risk has improved, there is limited loss modelling for wind and flood events.
With the increasing frequency of flooding in the region, AM Best believes that these risks are not yet sufficiently priced into policies, and the potential severity of these un-modelled risks pose a threat to the market.
In conclusion, AM Best says market conditions for MENA reinsurers remain extremely challenging, with additional capacity quickly replacing exiting capacities, which propels reinsurers to seek diversification and reduce potential volatility in earnings.
However, the long-term trends in credit quality are likely to depend on a reinsurer’s ability to successfully execute growth strategies in a highly-competitive market.
